Governance

RHR International was mentioned today in an article in the WSJ about the recent revolving door for CEOs. Not that this is new. CEOs have been coming and going for some time now. But what was new was that among the 83 CEOs of publicly held companies surveyed, the board seemed to be a greater source of tension than it used to be. Nearly three quarters wish they were included more in board discussions of succession planning.  And as one would expect, the top two threats to their tenure, according to CEOs, were the current economy (39%) and rapid industry change (22%).  However, a third top threat to CEO tenure was strategy disagreements with the board (17%).  As a watcher of  CEO trends, I find it noteworthy that CEOs mentioned disagreements with boards and desire greater collaboration over transitioning.  The disagreements over strategy (spin offs, shedding assets, etc) does seem to be a rising cause for CEO exits these days. Something has changed.  I wonder if the new tension that is developing is because boards are more active now because of the criticism that they were no more than a rubber stamp on CEO activities or if the strategic choices facing boards today are infinitely more complex and disruptive. When no one knows the true answer, there is room for disagreement. CEOs and boards seem to be caught in this new tango.

Another finding which I liked seeing because it provides some hard numbers about something I have observed was that half of CEOs feel isolated and lonely. For this reason, CEOs should reach out to other CEOs in different industries, find mentors or retired CEOs to talk to. It can be debilitating so finding an ear to listen and advise is highly recommended.

Globalization. Everything is different and everything is the same.

In an interview with the Dean of Harvard Business School, Nitrin Nohria noted: “When I came to Harvard Business School in the 1980s, the vast majority of people were interested in studying America, because this is where they hoped to have job opportunities. As late as 1988, when I joined, less than 5% of our case [studies] were outside of the United States. Last year more than a third of our cases were global.” Similarly, Fortune‘s Most Admired Companies survey used to be broken into the America’s Most Admired and World’s Most Admired lists as if they were two different beasts. Fortune now combines them into one big list of the World’s Most Admired and rightfully so. As we are seeing with the ups and downs of the stock market, we are all interconnected. The reputation of UBS or Sony or Procter & Gamble matters the world over.

Global everything is on my mind because I am off to Asia to give a speech on reputation and how to build it, safeguard it and defend it. I’ve been catching up on how reputation plays out in Asia Pacific so that I can be a bit more relevant to my audience. As I am preparing, an article I found struck me as a good example of how things are the same and yet different.

As a keen observer on how reputations get damaged in a crisis, I am always on the lookout for estimates of that damage.  A recent article provided me with some valuable information on how Chinese companies perform when scandal touches them. Scandal plays out slightly differently in China and on their balance sheets than it does in the US and Europe/EMEA. An academic study examined hundreds of scandals linked to companies traded on the Shanghai and Shenzhen stock exchanges between 1997 and 2005. Revelations of financial fraud and various other similar crimes, such as embezzlement and kickbacks, definitely impacted share price as it does in the US.  The researchers found, however, that to really create a cataclysmic collapse of a company’s stock among Chinese companies, there had to be an additional element. “The study found that companies caught up in mere accounting scandals saw their shares drop by an average of 8.8% over the six months on either side of the incident. In those involving the bribery of government officials or theft of state assets, on the other hand, the stock fell by almost a third.” As they conclude, “In China and other less developed markets….business is done on the basis of political and social relationships, not numbers.”  Companies are all impacted by financial scandal but if you undermine the government in China or any of its officials, expect that your financial damage will be compounded by losing discounted financing, access to trusted suppliers, loss of customers, land acquisitions and other benefits that can come with good government relations. Thus, being on good terms with government is critical to success in China. In many ways, this is also becoming the norm in the US as government plays a more visible hand in business affairs.

I was quoted by Fortune‘s Geoff Colvin in the August 15th issue. He wrote about the Murdoch scandal and mentioned how “large ideas emerging from this story so far will influence companies of all types for years to come.” One of those large ideas is that we have officially arrived at the pivotal point where reputation has an edge over financial performance. As Geoff says, this is Reputation’s Moment. Companies may not have fully noticed but reputation is indeed “the new currency of corporate success.” Music to my ears.

In the article, Colvin makes a few points that could not be truer. I excerpt some below which includes my take on reputation as the new metric of corporate success.

“Previous major scandals were mostly financial; the numbers were lies. Not this time. The damage so far derives en­tirely from behavior—phone hacking and possible police bribery—that ap­pears to be illegal but has nothing to do with reported financial results. Wheth­er it’s illegal doesn’t matter anyway; it’s slimy, and that’s enough. News Corp. is deeply tarnished, and the financial ef­fects could be significantly bad.

The company has lost about $5 bil­lion of value in the few weeks since the scandal hit. Longer-term effects could be much worse. “The greatest reputa­tional threat to News Corp., aside from criminal prosecution of Murdoch fam­ily members, lies within regulatory and policy circles,” says Rupert Younger, director of the Centre for Corporate Reputation at Oxford University’s Said Business School. News Corp.’s televi­sion businesses—TV networks, TV sta­tions, and satellite broadcasting ser­vices worldwide—are together a major source of profit, and they’re all subject to government regulation. Govern­ment leaders have treated News Corp. gingerly for years, but now “politicians who have been afraid to tackle such an important company are starting to feel that it may be possible to do so,” says Younger. “This could literally destroy News Corp.,” in the sense that the com­pany could be broken up.

Long-term damage to the company’s reputation among customers, employ­ees, communities, and others could also hurt. “In this new reputation economy, people care about whether a company shares the same values as they do,” ob­serves Leslie Gaines-Ross, chief reputa­tion strategist at the Weber Shandwick communications firm. Her reading on the scandal so far: “A clearer demon­stration of the direct relationship be­tween corporate reputation and cor­porate well-being is hard to imagine.”

 These two ideas, the one-man prob­lem and corporate reputation, are ob­viously related. At News Corp. they’re two sides of the same coin. Yet Rupert Murdoch never seemed to put them to­gether. Long before this scandal, he said, “Our reputation is more important than the last $100 million.” He was right.

 In this brave new recessionary world, we have evolved into a reputation economy where companies are trading on their reputations like never before. They are trading for better regulatory favor, more loyal customers, higher skilled talent, more positive word-of-mouth and more capital. Reputation has become an account in credit that you can draw down on or add to. In this new reputation economy, people care about how decisions are made and whether companies share the same values as they do. It is not just value, as in dollars earned, but also values, as in standards maintained, that has become a crucial element of corporate success.

As a believer in “soft power,” I think that I have to make an exception when it comes to presidential leadership and politics. President Obama may be in need of  using a slightly hybrid type of power on the hard-soft continuum. Soft power is a term that has gained prominence in how leaders communicate whether they be presidents, prime ministers or CEOs. Soft power became part of the business lexicon when it was defined by Joseph Nye at Harvard’s Kennedy School several years ago – ”Soft power rests on the ability to shape the preferences of others.”  It is different from “hard power” which uses sticks, carrots and sometimes coercion to get things done.  Most CEOs today, like Obama,  use soft power to influence outcomes, get employees to follow their strategy and treat customers well.  We see CEOs walking the halls, holding town meetings, sending out congratulatory notes, caring about the community and so forth.   The command-and-control hard power employed by CEOs  of years past does not work as well in the Information Age.  

Obama’s bi-partisianship and consensus-driven “soft power” approach  may be in need of a serious shift. Instead of leaning closer to the soft end of the power spectrum, President Obama needs to lean forward using more “firm power.”  There has got to be an in-between where President Obama can lead the country and the U.S. can lead the world with immedicacy, steadfastness and hard action.  As Nye has said, “Reputation has always mattered in political leadership, but the role of credibility becomes an even more important power resource because of the paradox of plenty.”  Obama’s reputation for credibilty is bruised. Coalition-building takes too long and is too hard to measure when pennies, jobs and confidence count.  His activities and communications are too diffuse at this time of global economic crisis. Firm power might just be the answer for these unusual times.

[Whether firm power applies to CEOs, I do not think so. I still that that soft power gets better results and attracts the best talent when employed by business leaders. And ultimately....CEOs do not have to build coalitions in the way that politicians do. CEOs can fire the nay-sayers more easily.  Presidents do not have that option. ]

The S&P downgraded the U.S. credit rating last night. The full report is here. What struck me in its overview are these two points (below) which directly speak to how our fiscal reputation is being managed. In other words, the ability of our governing leaders to work effectively as a management team is no longer putting the US at the head of the class.  We all know that when corporate boards do not function well, they are called to task, reputations gets tarnished and board members find themselves disinvited to serve. We now see the same reputational metric of good governance being applied to our government and the picture is not pretty. S&P is essentially saying that our ability to govern fiscally and responsibly is ineffective, less stable and more unpredictable than it was earlier. And our ability to collaborate across parties is in question.  It’s not just the credit rating that’s being discredited but our fiscal reputation as well.  America’s reputation for fiscal safety is being downgraded as well.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

   Interesting article on what boards talk about when they talk about sustainability.  The interview was in MIT’s Sloan Management Review with Christoph Lueneburger, head of Egon Zehnder’s sustainability practice. He tells a wonderful story about something that was said by the founder of Patagonia that is worth repeating.

“I think Patagonia is a leader. I had a conversation with Rick Ridgeway the other day, who leads sustainability at the company, and he said something fascinating. They were doing their Christmas catalogue, and Rick was down there, looking at the always-beautiful pictures and so forth. And Yvon Chouinard, the founder, says in the meeting, “That’s a nice catalogue, but tell me how it is that we’re not just incenting people to buy more stuff they don’t need?”

As Lueneburger says, Patagonia is not saying that its all about growth but instead saying, “It is not growth that will ensure our sustainability, but values.” Yes, Patagonia is exceptional and privately-held but this is where the intersection between value and values happens in the right way.

  Lawyers and communications specialists seem at times to inhabit entirely different worlds.  This is something that I’ve often thought about but has received little attention in the public relations and legal counsels’ worlds. So it’s time to think about this new trend in reputation managment that can help companies managing crises and issues better.

Consider this example I was told that has to do with the comments of one anxious general counsel reviewing his company’s first few Tweets.  “Looks good but you have a typo at the end,” the in-house counsel warned the communications officer.  The more socially-savvy communications person quickly replied that the so-called typo — a colon and closed parenthesis — was none other than that now nearly universal icon … the smiley face .

Of course, not all general counsels are so unfamiliar with standard and new social media customs and practices.  However, companies can no longer afford a disconnect between legal and communications.  In times of crisis, particularly, the general counsel  (GC) and chief communications officer (CCO) represent two departments often at odds with one another.  Lawyers typically urge minimal or even no public comment out of fear that admissions might damage a company’s case in a court of law, while communications professionals typically demand prompt public comment, even a CEO apology, to avoid further damage to a company’s reputation in the court of public opinion.

As the “information age” produces one corporate crisis after another and social media zingers multiply at alarming speed, everyone is responsible for keeping a watchful eye on defending company reputation as well as protecting against slander, libel and other legal  difficulties. Despite decidedly different approaches, GCs and CCOs are now both finding themselves participating in the same “reputation management” strategy meetings and conference calls.  They now have no choice but to trust and understand each other.

Here are three ways that these corporate officers can get on the same page:

1. Socialize.   Instead of dealing with problems incident by incident, start strengthening the relationship between GC and CCO by getting them to the table to jointly craft the company’s social media policy and guidelines.  Only about one-third of companies have such policies which leaves plenty of seats left for the two departments to fill. Agreeing to and understanding the needs of the other and providing for thoughtful compromise ahead of time can only help protect against trade secret violations, adverse publicity, confidential leaks and inadvertent disclosures about employee departures and misbehavior. Companies with employees who know  what’s allowable and not allowable on Facebook, Twitter, LinkedIn and blogs because the GC and CCO have cooperated will save their companies sudden embarrassment and reinforce continued cooperation between the departments.
2. Scenario Plan.  The time to build mutual respect is before reputation risk knocks at the door. Best practice requires getting  GCs and CCOs together with CEOs, HR, IT officers and others to rehearse various best and worst case scenarios, online and offline.  After a few sessions of rapid response simulations (we have an online simulation crisis drill called Firebell to do exactly this),  GCs and CCOs will have the opportunity to work out obstacles and craft prepared statements to hypothetical crises that will give them a head start should real crises occur.
3. Value Set.  Anchor both communications and legal concerns to the company’s core values. The values by which a company operates serves as the grease that reduces the natural friction between legal and communications best practices.  Both departments need to consistently call up company values – for example, integrity, good governance and customer always comes first – as the standard by which any legal or communications decision is judged.  Once the primacy of company values is accepted as the ground rule, cooperation between GCs and CCOs can be more easily facilitated.

Found myself up at 4am reading about Governor Cuomo. Jet lag sure is a hanger on. When I was in Asia, people told me that for every two hours in time difference, it would take one day to recover. So because I was in Australia and Asia, I figure I have about 7 days before I feel like myself. I am at the half way point but 4am is not pretty to be wide awake, jet lag or no jet lag.

So I found myself reading this article on New York Governor Andrew Cuomo’s first 100+ days in office, a transition similar to CEO transitions.  The headline read “Cuomo Stands Out Among Peers for Low Profile.”  The author was a bit incredulous about Cuomo’s low visibility: “In fact, since taking office in January, Mr. Cuomo has neither taken a single trip out of New York nor appeared on any talk shows.” Can you imagine– no talk shows! That is downright renegade.

Among the CEO class, the governor’s actions are standard operating procedure. Apparently most political figures have not gotten the memo telling them about the importance of getting their house in order before getting out in the headlines. When I talk to CEOs, my advice often is to do exactly what Cuomo is doing. That is, keep a low profile because “What’s there to say?”  New CEOs have not done anything much in 100+ days to crow about. 100 days is not a track record.  The most important duties in the first 100 days are to set your agenda, build your executive team, listen and learn and communicate internally. That’s how enduring reputations are built.  Therefore I agree with Governor Cuomo’s inclination to keep a low profile. The best insight in the article came from Hank Sheinkopf, a political consultant, who was quoted as saying, “Keep the focus on policy, not on personal matters of any kind, and ensure that there is nothing else but that discussion. He is the all-business governor.” That’s exactly it. Build your reputation on good governance, getting down to business (jobs and budget) and showing that you mean business.  Cuomo’s reputation as the all-business governor will stick if he keeps this up. Sounds like a welcome change. This kind of first 100 days gets my vote.

I was surprised in our recent research on Social CEOs that CEOs we studied were not silent over the past two years. Whether in spite of or because many CEOs and their companies suffered significant reputational blows in the past year, CEOs did not pull back from traditional media — newspapers, magazines and news services — but used them as vehicles to narrate their company point of view and tell the story as they saw fit. In 2009, the world’s top CEOs were quoted 28% more than in 2007.  If you remember, 2007 was a good year when everyone had a reason to speak up. CEOs are clearly taking their role as company narrator to heart. I believe they now realize that silence gets filled by detractors and over the past two years, the knives have surely been out.  As well, I think that boards are more demanding of their CEOs to take their story to the media. In five years, I think that more CEOs will be taking to the “social” airwaves as well.

Korn/Ferry just released some new research among executives and board members worldwide. Risk management is clearly a topic du jour among the executive class. The survey found that nearly six in 10 (57%) are spending more time and attention on risk management. In light of the rolling crises that seem to be playing out in the media over the past eight months, it pays to be prepared and know what’s on the horizon. In our business at Weber Shandwick, crisis response and crisis preparedness seems to be on the upswing, thereby highlighting top execs’ concern over being in the “hot seat.”

Two findings stood out. First, a full 59% said that the recent scrutiny on reputation risk has had a good effect on how Boards perceive the need for crisis preparedness and reputation management. Steve Mader at K/F says that the survey “shows the majority of companies have already taken practical steps to enhance their risk management practices and awareness.” I agree.

Secondly, as you have heard me say and post, the CEO is the guardian of the company’s reputation which includes such components as people, products/services, responsibility, financial performance, leadership and “values” or “ethics.” K/F asked these executives who at the company has direct responsibility for risk management and the lead candidate was the CEO at 43%. Next to the CEO came the COO at 19%. CEOs continue to get all the blame for ethical or reputational transgressions and all the credit when things go right. That’s the deal.