reputation risk

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.

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.

Chris Perry (@cperry248) who is our digital communications president, wrote this really good post on Forbes about social CEOs. I am taking the liberty of repeating his 5 must-dos for CEOs wanting to get social or even considering it. I would probably add one more and that is to find yourself a buddy who can read your Tweets as a sounding board when you first get started. I think that that second opinions can save oneself from having a red face and worth the try until you feel comfortable enough to try it alone.  And maybe it's worth having a buddy just as good practice when it comes to Tweeting or even Facebook.  They might not be good golfing buddies but hey, this is a new age. Take his advice. It is seriously good. Here they are.....straight from Chris. Realize you shine bright in social mediums. Social media participation is a public appearance where everything is on the record. Assume that comments will be picked up by the press as well as examined closely by your customers, staff and others watching your company. Speak and act accordingly. Recognize your role as Chief Narrator. Social platforms like Twitter aren’t a sounding board for a CEOs innermost thoughts; they’re an extension of other modes of communication you use as the lead executive of your organization. There’s great opportunity to share thoughts on your company or industry issues that get amplified through networks that reach employees, investors, customers and the press. As with existing communications efforts have a plan in place as you engage. Anticipate social remarks being a part of a permanent public record. Avoid posting or tweeting on topics that you would never discuss aloud in a public forum. Badmouthing competitors, going too deep into personal affairs or speaking about divisive issues is not the way to go. Don’t be gun-shy when engaging online, but anticipate that what you say will generate the same reaction as if it were published in the press. Don’t court controversy if you can’t take the heat. Opinions on relevant industry issues and current events that affect your business are fine. But steer clear of statements that might be controversial – unless you want to be at the center of the storm. Off the cuff remarks can have a massive ripple effect to be managed your staff, PR team and others tied to the issue after the fact. Pause for a moment in private before you go public. Despite the inherent risks embrace your humanity. Words of caution don’t mean you can’t let your personality shine through. In fact, this is one of the best ways CEOs can engage on a deeper, more human level with stakeholders. Personal insights into what it’s like to lead an organization show authenticity. Just remember that there are limits to what’s appropriate to share.   Any leader looking to engage through social media can harness the power, or suffer from the peril, of the medium. While it provides a forum for new interaction, new communications policies have similarities to traditional media guidelines. Keeping that in mind will help you participate in ways that adds value, not headaches, to your organization.    

  Because I am off from work for the holiday, I have a little time to catch up on things I meant to read in the months before. I was particularly interested in some research on CEO transitions and its impact on the value of the enterprise conducted by FTI.  A few facts jumped out at me from their study among the financial community. They found that one-third (32%) of investor decisions are impacted by the reputation of the CEO. Moreover, the reputation of the CEO was more important to investors than the reputation of the company's products and services. The research covers the value at risk depending on what type of CEO transition occurred. The greatest risk to the enterprise is when a CEO is forced to resign. Because of my work on CEO tenures and how to build CEO reputation, the findings confirm my own research over the years that CEOs need to show success by that 12 month marker. FIT found that investors give new CEOs about six months to assess the challenges and opportunities facing the company, setting a vision and strategy.  They give new CEOs more leeway to improve market performance and valuation -- about 12 months. After the first year, all engines need to be firing. Another particularly interesting finding was what investors look at in their first 100 days to further establish the CEOs credibility in their eyes....here is what they said was of "significant importance." Despite the ranking for "charisma," it is still interesting that it is still estimated to be of high importance and only 16% said it was of limited importance.  FTI concludes that investors take a multi-dimensional view of new CEOs. They expect to see it all.

During First 100 Days Of A New CEO	“Significant importance”
Grasp of the company’s challenges and opportunities	96%
Knowledge of/experience with industry dynamics	92
Vision	88
Operational focus	88
A strategic plan	88
Leadership style	76
Charisma/personality	54

 FTI Consulting  

You've heard this statement before. "What you spend years building, someone can  destroy overnight." I have probably written this several times on this blog when talking about crisis and reputation risk and I certainly wrote something very close in my book on reputation recovery. Well today it was cited in an article about GM's former CEO Rick Wagoner. The article was about his graduation speech made at Virginia Commonwealth University. A short 12 minute speech about "taking risks and accepting defeat gracefully."  He has been silent for over three years. Talk about grace.  But in his closing lines, he made the statement about building and losing reputation which Mother Teresa apparently said (I did not know and am glad to have learned the origin of this statement). And he added his own two cents at the end to this famous piece of advice about reputation. He said "Build anyway." A good reminder to those who wonder if being CEO is worth it or leading a country, I might add.

There has been a fair amount of news this year about people who risk everything and ultimately lose their whole reputation.  Why would anyone take that risk?  An article on "What makes a rogue trader?" made me think about people who take risks without realizing that they have so much to lose.  Also the news today about Illinois Governor Rod Blagojevich being sentenced to 14 years in jail for corruption made me wonder what drove him to this pitiful situation. Money? Power? Just because he could do it. Interestingly, the article posits one theory...."What matters most of all is not how much a gamble alters their wealth, but where they start --whether they are already satisfied, or have suffered loss. Their overriding trait is their inability to accept loss." Thus, these people are compelled to do whatever they have to in the name of gaining more wealth or achieving political office to avoid loss of their stature or status or sense that they are okay human beings. The loss seems to always outweigh what they sought in the first place. And these risk-takers lose all remnants of reputation and respect in the end. Something that you can't even put a price on. Makes you think about Bernie Madoff. What was he thinking? His reputation is in shreds, at best.

We recently released an interesting exploration on the relationship between top corporate communications officers and legal counsel when it comes to reputation management. I have already posted about this relationship where these two senior corporate officers seem to be working together more than ever. In light of the multiplying crises that companies and its leaders are facing on an hourly basis, the relationship between the two officers including outside counsel has to be strong and respectful.  As we say in the report, “general counsels (GCs) and chief communications officers (CCOs) are now finding themselves participating in the same reputation management strategy meetings, conference calls and contingency planning sessions. GCs, external legal advisors and CCOs now have no choice but to trust and understand each other.” There are several noteworthy insights and best practices in “Managing Legal and Reputation Risk” but two stand out for me in particular. The first is that you can’t prepare enough and expect surprises. ...”executives still find the nature or intensity of the situations they’ve managed to be unfamiliar or unanticipated on some level.” This is so true. There is always something overlooked or unexpected.  In fact, it seems to me that it is getting harder to find precedence for some of the crises that arise. For example, the Olympus crisis has few precedents.  For this very reason, being ready, practicing a few scenarios ahead of time and giving time to “near misses” are sensible readiness processes to have in place. Another finding that resonated with me was how general counsels appeared more willing today to balance the interests of the business with legal priorities. They said this, not just me. There are times when the short term hit (such as apologizing or admitting that the company could have done better and will do better in the future) outweighs the costs of winning or losing in a court of law down the road. The fact that many of the legal counsels we interviewed agreed that the “short-term pain for long-term gain” is often the right strategy demonstrated the transformation in communications-legal circles that we explored.

Another stat to add to the many on how long it takes to recover reputation. Actually I should say...to add to the few. There really are not that many besides the one we did some research on that shows it takes about three to four years after a crisis. However, I found this one from the Ponemon Institute and Experian that says that nearly 850 executives say that it takes about one year to restore an organization's reputation after a data breach.  It also found, depending on the type of breach, that the average loss ranges from $184 million to over $330 million. Or put another way-- the minimum brand damage is a 12% loss which could increase to 25% of the brand value if the breach was horrific. Just as disturbing is the lack of data breach preparedness according to the research. A fairly large 43% had no plan in place to deal with a breach of confidential leak or theft of customer data.  Perhaps this is why there seem to be so many. Most companies are unprepared and do not think of a data breach in the same way they do another type of crisis that is more common. Either way, it is critical to be prepared since if you really want to make your customers mad, a data breach is a surefire way to make that happen.