Governance

My good friend Bob Eccles, professor of management practice at Harvard Business School, wrote an article (The Performance Frontier) that just appeared in the Harvard Business Review.  Here is a PDF. I’ve been extremely interested in his work on integrated reporting for awhile now. What is integrated reporting? Essentially it is One Report that combines financial and non-financial information interactively into one document. A good example of a company that has done this is Natura. Although integrated reporting is voluntary today, it is required of all companies on the Johannesburg Stock Exchange. But integrated reporting is much more than an online CSR showcase. When it is done right, it is an authentic and innovative two way conversation where a company convenes its stakeholders to discuss its progress meeting its financial and nonfinancial goals. For example, Natura does this through Natura Conecta where the public is invited to have a discussion on environmental and social issues related to the company. It is a living exchange, not a static one that is one-way and more push than pull.

Bob’s article has an interesting slant which he points out in the introductory sentence . . .”But a mishmash of sustainability tactics does not add up to a sustainable strategy.” He argues, along with his co-author George Serafeim also at Harvard Business School, that we need a solid framework for simultaneously boosting financial performance as well as doing good. Tactics alone won’t do the trick. They provide a model for identifying the most environmental, social and governance (ESG) factors that drive shareholder value so that both financial and ESG performance are enhanced, not just one. A company that focuses on sustainability without paying attention to the financial costs is not going to have a genuine sustainability strategy that meets everyone’s interests. Similarly, a company that focuses solely on financial performance to the exclusion of good ESG performance will lose out as well in terms of public opinion and support. A major component of reaching this perfect balance, according to them,  is by identifying major innovations in products, processess and business models that achieve these improvements and accomplishes superior financial and sustainability performance. A good example is the one with Natura mentioned above. They also cite innovative business models from Dow and Hong Kong-based CLP Group. And then, of course, Bob argues that these activities are ideally communicated through integrated reporting.

What fired me up was the SASB (Sustainability Accouting Standards Board) Materiality Maps that have been created for 88 industries in 10 sectors.  Each industry has its own map that prioritizes 43 ESG issues and ranks them in terms of materiality. Not all the maps are complete but take a good look at this one for the health care sector. It shows which ESG factors impact financial performance so that a company knows what to prioritize. It’s a great contribution to understanding ESG factors as well as what drives strong corporate reputation. Don’t miss it.

And congrats to Bob and George for raising an important question about how to better balance financial costs and sustainability costs so that they complement one another instead of taking away.

It seems like every year I hear that Chinese brands and their reputations will be going global. Apparently The Economist thinks that 2013 is the year that Chinese brands will truly go global. Their reasoning is that Chinese companies have grown as big as they can in their own country and now need to expand overseas markets. A second reason is that Chinese companies are now longer just B2B ones but are now competing with brands that are B2C that develop dynamic marketing campaigns and require different campaigns. Some of these brands that we will be introduced to in 2013 are Baidu, Haier, Tencent, and Metersbonwe. Other reasons that Chinese companies are finally going to go global include seriously building global cultures as Lenovo has and making sure that corporate entities include product names that are less complex and more recognizable. As the article says, Jianlibao which is an energy drink, had trouble expanding beyond Chinas because its name was hard to pronounce. Try Wanxiang.

Global Chinese company reputations won’t be easy to build regardless of how much muscle they put behind them. There is a well-entrenched perception in other regions that Chinese companies produce low quality products and are poorly governed.  William Brent, a colleague of mine who helps run our Emergent China practice, was quoted in this Economist article as saying that “2013 will mark the year when Chinese multinationals come face to face with transparency.” He is right. Corporate governance is a driver of strong reputations.

If this is the year of Chinese reputations, I look forward to it.

What spooks markets the most? If you closely follow crises, you probably think about how many different types of crises there are. For example, how do the markets react to a crisis that is due to the questionable behavior of the company or employees? What about product recalls? Or litigation? What about loss of customer data? All good questions to ask about reputational damage. International law firm Freshfields Bruckhaus Deringer decided to investigate how the markets react to different crises and how long the crisis lingers. This chart below is from their study:

Behavioral crises (company or employees acting questionably or illegally) have the greatest short-term impact on shares and the only type where the companies have the possibility of regaining their market share after six months. However, they spook the markets the most and can cause shares to crash by 50% or more on  the day they become public, according to the researchers. Investors, however, forgive these types of crises more quickly than others.

Operational crises (when the company’s functioning is halted due to a major product recall or environmental disaster) have a modest impact in the first two days of the crisis breaking but the greatest long-term effect on share price…down almost 15% after six months. One quarter are still down one year later. These type of crises strike fear in companies and reputations are hit for the longest period of time.

Corporate crises (companies where the financial wellbeing is affected such as liquidity issues or material litigation) made up more than one quarter of companies experiencing a share drop on day one. Most often, these companies recovered quickly.

Informational crises (when companies IT such as system failures or hacking) were of moderate concern to the markets. They did not fall more than 3% on day one. According to the research, none saw shares fall more than 30% within a year of when the crisis struck. Possibly, investors figure these can be resolved and its everywhere today, not necessarily at the core of the company’s business.

As the research states, “Our research shows that directors typically benefit from a window of 24 to 48 hours, during which financial market reaction to news of a major reputational crisis will be relatively constrained.”  In the public relations world, we often refer to the first hour after a crisis breaks as the “golden hour.” According to Freshfields, it sounds like there is an even longer” golden window.”

The natural question to raise is why does operational crises do the worst? Freshfields answers appropriately, “Crises that strike at a business’ core have a greater long-term impact on share price as markets are more likely to lose faith in a management team that cannot resolve a crisis that is intrinsic to its operations.” As Oxford Metrica’s research in 2012 for AON showed, management response is showcased for all to see when crisis strikes. The kind of  CEO or executive response can make or break reputations and create reputation loss of great magnitude if done poorly. To prevent such reputation loss, prepare!

Years ago when I wrote my book on reputation recovery, I told how disgraced Tyco International waited until they had proved themselves before launching a new advertising campaign. I wrote:

“When it was time to formally declare that the recovery process was officially in place, new CEO Breen initiated two noteworthy advertising campaigns. The first introduced Tyco’s brand-new 13-person leadership team that replaced the entire previous executive team. The advertising targeted to Wall Street, legislators, and employees featured the following statement accompanied by individual executive’s signatures: ‘‘We signed on because we believe Tyco has a bright future. We signed below to show you we mean it.’’ The signatures underscored the point that these executives had personally signed up for the mission. The campaign underscored how Tyco’s new leadership team was standing shoulder to shoulder behind Tyco’s improving reputation. The 13-person team portrait also communicated that new leadership was focused on the team, not the individual. According to Jim Harman, Tyco International’s vice president of advertising and branding, ‘‘The message behind this campaign was that Tyco had hired senior managers with the highest level of integrity from diverse manufacturing companies.’’

The advertising served as a reminder to influential stakeholders that Tyco was well on its way to rebuilding the reputation it lost.

AIG has now joined these ranks. If you recall, AIG was the recipient of the largest government bailout during the recent economic crisis and was on the short end of the stick when it came to public outrage. Since the new CEO, Robert Benmosche took over in 2009, AIG rebuilt its business and began paying back its loans to the US government. No one believed they would do it. And yet just yesterday, the government sold off what was left of AIG securities for a surprisingly big profit of nearly $18 billion in profit. Although they launched this new YouTube campaign about their comeback several weeks ago with the tag line, “Thank you, America. We’re proud to be keeping our promise to stand by you,” their timing is right and I dare say they hit the right notes in the campaign.

Boards continue to see reputation risk as their top concern.  In the third annual study by EisnerAmperLLP among board members, two thirds (66%) see reputational risk at the top of their agendas for concern, ahead of regulatory issues (59%).  In fact, reputational risk has grown while regulatory risk has remained stable year over year. Both IT risk and privacy risk showed increases from the last survey and reflect the many breeches in systems security that we’ve seen which inevitably led to attacks upon a company’s reputation. Similarly, according to the report, crisis management, is also an indicator of reputational concern.

What do board members really mean when they say they worry about reputational risk? In an open ended question, board members are most likely to be talking about product quality, liability and customer satisfaction (30% of all responses) followed by concerns about integrity, fraud, ethics and specifically the Foreign Corrupt Practices Act, (24%). IT concerns fell in at about 12% and environmental concerns at 8%. It always surprises me how little attention is paid to environmental issues at the top.

 How are risks assessed? About two in 10 get reports from executive management, discuss risk issues at board meetings and get help from professionals or outside experts. About one in 10 get information from the risk committee.  That seems like an area ripe for assistance.  The report interestingly mentions that recent years have not been kind to risk teams and that with all the recent issues and crises stealing headlines, boards are realizing that CFOs need greater support. In fact, the survey found that nearly two-thirds of boards are planning to enhance staff and increase audit coverage and about one in three are leaning towards hiring outside service providers.

I could have told them so.  Research (noted by WSJ’s Leslie Kwoh) from Lehigh University found that shareholders do think CEOs matter. They analyzed shareholders’ reactions to the unexpected deaths of chief executives by measuring the stock performance the day after the announcement as well as at other intervals leading up to 30 trading days afterwards. There was a 5.6% swing in share price on the day after the announcement that the CEO unexpectedly died (i.e., heart attack, plane crash). The swing was even more pronounced one month later, at 14.6% on average.  Interestingly, this swing has grown considerably since the 1950s, 1960s and 1970s. CEO reputation and the CEO’s impact on the company’s performance MATTERS. Decades ago, people believed that companies ran themselves pretty much. The CEO’s decision-making, strategic direction and ability to motivate employees and outbeat the competition is clearly understood today to have a profound effect on corporate performance and by extension, reputation. Good proof to add to my deck on why CEOs matter. Thanks to Lehigh’s Tim Quigley and researchers!

A few things from my week worth sharing. Some more important than others but certainly worth my musing about when it comes to reputational issues.

RED CURLY HAIR. I have been fascinated by the new movie Brave and what I have read about how they fashioned the red curly hair of the first female leading protagonist for Pixar named Merida. “Merida’s explosion of fiery ringlets started as a series of springs on a computer. The Pixar team created many kinds of springs, including short, long, fat, thin, stretched, compressed, bouncy and stiff. In order to give Merida’s hair volume, the springs were entered on the computer screen in layers. The layers varied the length, size and flexibility of each curl. We used 1,500 hand-placed, sculpted individual curls. There is this weird paradox where a ‘spring’ of hair needs to remain stiff in order to hold its curl, but it also has to remain soft in its movement.” Since I have red curly hair that does moves this way, I found it fascinating how challenging they found it to do when I see it live every day. It is a miracle of physics and hair-raising proportions (Merida has more than 1500 individually sculpted, curly red strands that generate about 111700 total hairs!) And also, I have a niece named Merida. My sister visited Mexico many years ago and decided that she loved the name. Apparently the Pixar people had the same experience because I read that it is a name found in both Spain and Mexico’s Yucatan peninsula. Merida will be the new Ariel. Red curly hair is going to break through and have a reputation of its own.

COMMUNICATING ETHICS. I attended a conference this week on best practices in ethics communications. The conference was sponsored by Ethisphere and others. Several companies presented how they have built a culture of integrity and ethical conduct and communicated it successfully. What was most telling was how much work and persistence went into building ethics-minded cultures. Presentations came from AFLAC, GE, AECOM, Realogy, Fluor and a few others. Every company had the usual communications vehicles to show such as posters, contests, wallet fold outs, web sites, internal awards, Q&As, banners, videos, newsletters, logos, screensavers, full weeks dedicated to compliance, and so forth but you could tell that ethics was baked deep within each company and there was zero tolerance for misbehavior or wrong-doing.  Moreover, these companies were willing to tackle the hard questions that get raised when ethics is discussed and confronted. Once a company goes down this road, there is no looking back.  Interestingly, AECOM spoke about a global advisory board which included business and political leaders that they posed questions to and asked for feedback. They found it useful when confronting the challenges of different cultures around the world.  Another great example of a truly imprinted ethics program came from the Panama Canal Authority.  Their program was stellar. GE representatives also spoke about their in-depth initiative which they refer to as The Spirit (Ethics) & The Letter (Compliance) and the importance of tone at the top. Amen.  For all the best practices presented, the CEOs were directly involved and critical to success, particularly because budgets have to be set aside for these kinds of initiatives. GE also spoke about the “need to get caught doing some good things,” having the courage to follow through and recognizing that there are no half measures. Fluor’s efforts were compellingly presented because they are a “quiet” company that made a big public commitment when they helped found the Partnership Against Corruption Initiative (PACI) in 2004 at the World Economic Forum.

STORYTELLING. Just to close the week, I was reading an article in The Economist on my way home last night about how Japanese companies could do a better job of storytelling and marketing their companies. It talked about the cultural bias where making things is considered more virtuous than selling them. It closed with an interesting quote that sums it all up. “In Japan, people say: the nail that sticks up gets hammered down—an engineer’s view. In the West: the squeaky wheel gets oiled—a salesman’s mantra. In a crowded global marketplace, even the best-engineered wheels need to squeak.” Food for thought.

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.

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.

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.