Always good practice to learn from crises or disasters. If they have to happen and tragedy occurs, at least we can try to apply lessons from them going forward. Crises, disasters or issues are sure to come to companies or organizations at one time or another. No one is immune — every company faces their 15 minutes of shame, not just their 15 minutes of fame.
The derailment of Metro-North Railroad in the Bronx one week ago today that killed four people and injured many is rightfully capturing a lot of attention on how to make trains safer.
I was reading this article about the derailment on my subway trip home Friday night and at its close, I came across this important best practice. “The railroad administration instructed the authority to adopt a confidential system to report ‘close call’ incidents.” Many companies could do a better job of understanding their close calls. Close calls are similar to “near misses” which are defined this way according to the National Safety Council:
A Near Miss is an unplanned event that did not result in injury, illness, or damage – but had the potential to do so. Only a fortunate break in the chain of events prevented an injury, fatality or damage; in other words, a miss that was nonetheless very near.
A faulty process or management system invariably is the root cause for the increased risk that leads to the near miss and should be the focus of improvement. Other familiar terms for these events are a “close call,” a “narrow escape,” or in the case of moving objects, “near collision” or a “near hit.”
If companies could include “close call” discussions on their internal monthly or quarterly calls, they’d be in far better shape to deal with disasters that do arise. Management could do better by discussing how they might handle near misses, how to make sure they do not happen, who else should be included in the discussion to prevent them and how to prepare should they actually happen. It could be an informal or formal hearing or process. A more formal best practice is sponsored by the American College of Physicians and the New York Chapter of the American College of Physicians — The Near Miss Registry. The online registry collects medical near misses before they actually occur with patients. The registry allows healthcare workers to voluntarily report medical “near miss” events” using a web based tool located at www.nearmiss.org and hosted by NYACP.
Unfortunately the tendency is to bury the near misses in the hopes that they do not reach top management. However, that’s exactly the point. If top management does not know how close a call they missed, they won’t be able to prevent them.
I think it is a good step that Metro-North is adopting this process.
A new study is out that shows that companies that engage in socially responsible behavior are also more likely to engage in socially irresponsible behavior. And the research found this to be fairly common among Fortune 500 company CEOs who work hard at setting a highly moral image and identity. How could that be? The paper, “License to Ill: The Effects of Corporate Social Responsibility and CEO Moral Identity on Corporate Irresponsibility,” was co-written by professors at London Business School and University of California, Riverside School of Business Administration. The author-researchers found that for approximately every five positive actions that a firm takes, it gives them license to commit one negative action. As one of the co-authors says, “These findings show that CEOs should be aware of this tendency so that they can prevent their companies from slipping into this pattern. Additionally, corporate boards can’t allow CEOs to rest on their laurels. They need to be vigilant in monitoring CEOs.” Good advice. They held up BP and Enron as examples of companies that proclaimed high corporate social responsibility (i.e., beyond petroleum and all the philanthropy engaged in by Enron’s Ken Lay) and yet transgressed.
You might be scratching your head. It is hard to understand how this could be. The research which is pretty impressive found that leaders who direct their company’s CSR strategy end up with “moral credits.” These moral credits blind them to irresponsible behavior and being less vigilant about how they manage stakeholder needs. And this goes for employees too who also tend to internalize the prior ethical CSR image of their employers and feel that they too are untouchable when committing unethical behavior.
The best part of the article or at least one of the many best parts is how they use the term CSiR for corporate social irresponsibility. It’s a new term to me and one I will use again and again.
I wanted to read the chapter in Trust Inc. by Linda Locke on “Trust, Emotion and Corporate Reputation.” I bought the book because Barbara Brooks Kimmel has done such a terrific job building Trust Across America-Trust Around the World, an organization focused on the fundamental element of trust. Linda is the founder of Reputare Consulting which is a reputation management consulting firm. I know Linda from events at Reputation Institute and her work leading reputation management at MasterCard. She really knows the field, is a thought leader on reputation, has powerful insights, and I follow her regularly on Twitter (@reputationista)…love that handle.
In the chapter, Linda mentions that facts are often not enough. It is a good starting place to build trust but if that’s all a company has to provide in a crisis situation, it is not going to work today. She says: “To earn trust, a company must go beyond the requirements, beyond the simple facts of the situation, and demonstrate that it understands the concerns of the stakeholders.” Showing empathy, care and concern are necessary ingredients to rebuilding trust, protecting reputation for the long-term and beginning to repair the reputation tear. What caught my attention was her recommended breakdown of communications content when a company’s reputation is under the glare of spotlights:
- 50% of a company’s external communciations should express care and concern
- 25% should express the company’s commitment to fixing the situation (what are you going to do, when and how)
- 25% should focus on the facts (again, facts have to be there but it is not all there is).
These are very helpful proportions to use when explaining to companies what they need to do about the content of their risk communications. What fascinates me the most, however, is how companies today have to show their “softer side” when they are in the middle of a brewing crisis and be more vulnerable and empathic. This is a major change in how companies are expected to communicate when they have done wrong in the public’s view.
Linda provides some case studies in her chapter that truly intrigued me. She provides a social-pyschological framework to understanding the public’s emotions to losing trust in institutions. Here’s one to share. She gave an example of a financial services firm managing their reputation during the horrific and unprecedented financial recession of 2007-2008. The firm analysed what people were saying about how they felt during this period. As she describes it, the firm found that three emotions were most evident in the public discussions about the financial downslide that was causing a real sense of fear and loss of trust. They were: irreversibility (consumers fear that what was happening was irreversible and would be permanent); unfamiliarity (consumers having never experienced anything like this economic uncertainty before) and involuntariness (consumers had no control over what was happening to them and could not influence the outcome whatsoever). The consuming public was paralyzed by fear and what could companies do to assuage their loss of trust. For companies faced with these raw emotions, Linda recommends explaining in everyday language (certainly not corporate speak) how the situation happened, how it is similar to a familiar experience they may have encountered in the past, the role of the responsible parties to fix the situation so it does not happen again and how the company will do whatever it takes to repair that broken bond of trust. And certainly empathisize with those affected and show you care if you want to keep your reputation from cratering.
Building trust is the bedrock of reputation. If your company is not trusted and credible, it is going to fail fast and I mean really fast.
It has been a crazy few weeks — traveling to Berlin, San Francisco and Istanbul. But I am back in the USA. So here are a few observations about things I’ve read and learned that I wanted to share:
1. Deloitte Touche Tohmatsu just issued a new report on reputation risk. Reputation risk was the top strategic risk among 300 global C-suite executives surveyed. The survey found 40% of respondents listed reputation as their top risk concern today, with their business model second at 32% and economic trends/competition third at 27%. In 2010, reputation risk was at 26% so we can see that it has moved to the very top of the C-suite agenda. Henry Ristuccia, global leader of governance, risk and compliance at Deloitte had this to say (love this quote): “Reputation risk is going to always be the meta of all risks…how you manage the underlying factors that could affect the organization’s reputation or brand…how resilient are the people, the culture?” The meta of all risks!
2. In Istanbul, I spoke about Reputation Warfare, the theme of my Harvard Business Review article. The occasion was the 2nd International Reputation Management Conference at Kadir Has University. It was very impressive because there are not many reputation management conferences in this world (Reputation Institute holds one annually) and here I was in Istanbul. Very forward-looking of the university. The summer protests in Turkey at Gezi Park was an interesting backdrop to my discussion on using social media as an opportunity to defend one’s reputation in addition to the risk. Additionally, there was discussion about how the protests had affected the reputation of the country. Tourism took a hit in July but from the looks of it, it was pretty healthy this week. I am going to keep a watch out for how Turkey repairs its reputation and what types of reputation recovery strategies are employed. All very interesting and doable. I also experienced some of the Turkish hospitality that they are so well-known for.
3. Just this past week, I read two articles on how Goldman Sachs and JPMorgan are repairing their reputations. All in one week. Clearly this is a topic that has grown exponentially and particularly in the financial sector. The Economist article on Goldman Sachs was fascinating because it described the scenario setting that is being used to train vice presidents to better understand their responsibilities to the firm when faced with ambiguous and complex challenges to doing business today. The case study is preceded by a film that is described this way: “…an emotive documentary on the history of Goldman Sachs, filled with interviews of luminaries and former executives, each hammering home the virtues that supposedly make the firm distinctive—teamwork, personal accountability and the legendary exhortation by Gus Levy, a former leader of the firm, to be ‘long-term greedy’, by which he meant it should forgo short-term profits if they came at the expense of client relationships.” I mentioned in a previous post how Goldman Sachs is super-engaging in training which included their CEO from the start. In addition, incentives have been revampedd and tied more to collaboration and teamwork. The WSJ article on JPMorgan’s CEO Jamie Dimon focuses on how he is converying “business as usual” as he faces an imminent federal lawsuit, another revealing reputation recovery strategy. He has been touring midsize cities such as Cleveland, Oklahoma City and St. Louis meeting with local businesses and community leaders that are supported by JPMorgan’s philantrophy. According to the article, Dimon’s message are fine-tuned, upbeat and focused on the customer.
Reputation resilience is a topic I often think about because it should be on all leaders’ minds. How can I build the most resilient culture so that we can withstand a crisis that risks our hard fought for reputation? A new report from Schillings in the U.K. examined UK FTSE 350 and leading private companies about reputation risk and resilience. Respondents were Communications, Legal and Risk executives. Here are some of the findings:
- All executives surveyed are spending more time on reputation risk management than they did two years ago — 80% say more time (among risk managers), 68% (among communications heads), and 53% (among legal executives). No one said less time.
- Only 17% say that there is formal reporting to the board of directors on reputation risk. Clearly, not good enough.
- The top five threats to their company’s reputation are (in rank order): business underperformance, information risk, operational risk, health and safety incidents, and employee behavior. Social media comes in at 6th place.
- When asked what was the biggest obstacle to making reputation risk management top of mind at the company they work for, 37% of respondents said “CEO/Board removed from reputation risk: lack of focus without a crisis and too much reporting.” That is unfortunate. Companies should not need a real crisis to get them to pay attention to risk management.
- Fortunately, communciations and legal executives are onto it. They know that their jobs require them to take charge of their company’s reputation and any associated risks. A full 72% of communications executives said they feel directly responsible and 63% of legal executives are responsible for their company’s reputation.
- How resilient are companies to facing challenges to their reputation? There is a surprising (to me) fair amount of confidence. 55% are “confident enough,” 29% are “very or extremely confident” and 16% are “not at all confident or unsure.” Although this bodes well for many companies, I would be wary – essentially 84% of top executives are confident. If you ask me, they are not worrying enough about all the possibilities that could befall their reputations. Risks to reputation seem to be coming from all directions today and being over-confident is the wrong stance.
Another interesting aspect of this newly issued report is that Schillings is a law firm. They have rebranded themselves to be all about managing reputation risk. Their tag line is “Law at the speed of reputation.” Serious business. What would compell a law firm to switch to focusing on reputation? Here is what they say about their transformation: “To continue to lead at a time of such extensive change, we’ve fundamentally changed our own offering. By combining our unrivalled expertise in reputation law with new risk consulting and IT security expertise, we have been able to create an integrated offer that continues to safeguard the successful businesses and individuals we represent whilst living up to the promise that underpinned our business from day one.” It would be hard to name many law firms that have done the same. Reputation is changing the face of organizations all across the globe and some firms see the opportunity ahead. Maybe Schillings sees the risks down the road for them as a law firm and are taking their risk by the horns. Interesting approach.
A new McKinsey survey among board members reports that members acknowledge knowing little about risk. Nearly three in ten (29%) say their boards have limited or no understanding of the risks their companies face. Even more compelling, members say their boards spend just 12% of their time on risk management, an even smaller share of time than two years ago. Not sure about you, but I’d say that the business environment has become more complex and risky, not less complex and risk-free.
This is not good news for executive teams. When it comes to risk management, reputation is high on the list of vulnerabilities that can damage a company’s good name. This has me thinking that if board members are not focusing enough on risk, executive teams are going to be held even more responsible for any misdoings and misdeeds. They had better been attuned to crises and risks that are lurking around the corner. CEOs and their direct reports should make reputational issues an A-1 priority on their management agendas.
I received an email about two weeks ago asking if I had information on whose most to blame when crisis strikes. Years ago, I asked that question of executives and if I recall right, CEOs received most of the blame, regardless of whether they knew about the problem or not. The McKinsey research is hinting at the same blame chain. The CEO takes all the credit when things go right and all the blame when things go wrong. The board is looking in all the wrong places. CEOs, beware.
Reputation matters and has grown in importance to companies and their leaders. In a recent article in ABA Banking Journal on the banking industry’s reputation, the topic of intangibles came up that I thought was worth emphasizing.
Years ago, investors only cared about financial performance but it is now clear from some research that 80% of the value of S&P companies is attributable to intangibles like reputation. This estimate is similar to what I have been using for years since I first learned about intangibles vs tangible assets and the enormous influence of reputation on market value. Social media has now made those intangibles easier to access and therefore opened up to most of us how companies treat their employees, build leaders and brands, follow codes of conduct, treat intellectual property, disclose information, care about communities, etc. The article pointed out that Bloomberg terminals provide information on more than 120 environmental, social and governance measures that help investors value the intangibles that drive reputation. This is an important point because whereas financial performance is based on looking backwards, intangibles now available on these types of data aggregators are more forward-looking and give a clearer picture of what might lay ahead for particular companies. The article points to another data aggregator called CSRHub which looks at companies through the lens of metrics including “best of” and “worst of” awards and rankings. As the article says, “Since the market calculates the value of businesses based on anticipated future earnings, poor reputation can be an indicator of systemic problems, which can have an adverse effect on revenues.” It is hard for me to remember a company whose reputation failed and where when the digging began, there weren’t any warning signs ready for the asking. Sometimes I go to Glassdoor.com to just read about where those early warning signs might be for particular companies and wonder why no one has investigated further what employees are only to quick to tell the world. Apparently there’s a banking industry site with reviews called MyBankTracker which was new to me.
Would we have known about Enron’s demise if Glassdoor.com or some other similar site had existed when Enron imploded? I sometimes wonder about that.
I was eager to read JPMorgan Chase CEO Jamie Dimon’s Letter to Shareholders this year. Considering the London Whale episode of the past year, I thought his Letter would be revealing. He clearly did not skirt the issue. I cut and paste some quotes below which are direct, apologetic and conciliatory. Also, I used the picture from the Letter to Shareholders here because it was surprising in that it almost looked like a man running for office but mostly because it is something that we advise clients which is to make better use of photos of their CEOs and execs with people (preferably employees) and not alone in some corner office isolated and solitary. You can’t know what is going on in your company by spending too much time in the office. It derails CEOs all the time.
What I like was how he presented his lessons learned for his reputation recovery plan. They are bulleted below as follows and include a favorite piece of advice of mine — problems don’t age well:
- Fight Complaceny
- Overcome conflict avoidance
- Risk Management 101: Controls must match risk
- Trust and verify
- Problems don’t age well
- Continue to share what you know when you know it
- Mistakes have consequences
- Never lose sight of the main mission: serving clients
On Responsibility: “I also want our shareholders to know that I take personal responsibility for what happened. I deeply apologize to you, our shareholders, and to others, including our regulators, who were affected by this mistake.”
On Complacency: “Complacency sets in when you start assuming that tomorrow will look more or less like today – and when you stop looking at yourself and your colleagues with a tough, honest, critical eye. Avoiding complacency means inviting others to question your logic and decisions in a disciplined way. Even when – and especially when – things have been going well for a long time, rigorous reviews must always take place.”
On the Aftermath: “There are a few things, however, that occurred this past year that we are not proud of. The “London Whale” episode not only cost us money — it was extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing.”
On Reputation Committees: “That’s why we have a risk committee framework within the firm with extremely detailed reporting and many other checks and balances (like reputation committees, underwriting committees and others) to make sure we have a disciplined process in place to question our own thinking so we can spot mistakes before they do real damage.”
Lessons on dealing with a crisis are always helpful, especially when your company’s reputation is in jeopardy. I found this list particularly worthwhile because it was written by Sallie Krawcheck, one of the most senior women on Wall Street. I heard her speak at a Forbes conference years ago and really enjoyed her tales of juggling work, family and husband. She was very down-to-earth, approachable and humble. She recently wrote on her LinkedIn page about the lessons she learned from leading through various crises and as she says, watching others make career-ending mistakes handling crises. Here is a brief synopsis of what she advises:
1. Be heroically available. I wholeheartedly agree with her that there are times when executives wish they could just close the door and wait until a crisis fades. We all also know that this strategy does not work and rarely happens. She mentions a colleague who hosted a call for Financial Advisors when investments had gone south and how he said he’d stay on the call until every last question was answered which lasted late into the evening.
2. Allow people to ask real questions, even if you don’t want to hear them. We have all been in meetings when no one wants to ask the hard question and most people just throw softballs. Leaders have to create an environment where the hard questions can be asked and there are no repercussions. Sometimes I advise a leader to ask the question himself, provide the answer and get on with it. Once the question is asked, others might have the courage to speak.
3. Frequency matters more than perfection. Krawcheck mentions how her management team had a call at the start and end of every day when the economy was tanking a few years ago. She says that some of the calls were not all that good and packed with answers but at least everyone knew they would be getting an update on a regular basis.
4. On your message: Repeat it, repeat it, repeat it. And do in different media. That is dear to my heart because those of us in public relations understand that to reach people who need certain information, you have to reach them where they are. And they are often not where you think they are. Some people read company emails, some ignore them. And as Krawcheck says, some people are readers and some are listeners. Some are in facilities where there is no easy access to electronic information. Make it easy to find out what needs to be known.
5. Bring in people who know more than you do or provide a different perspective. I found this one unusual since so many companies keep all their information and goings-on close to the vest. And rarely do they want to admit that they might not know something. She mentions how during the recent downturn, her company brought in some experts to bring a new voice into the conversation even if they were saying the same thing she was saying. This is good counsel.
6. Let them see you sweat, but don’t let them see you tremble. Another piece of good advice and a good way to end this post. It is okay to work super hard and show that you are not home for dinner with the family night after night when crisis is on your doorstep but make sure that your team does not see you scared. Being confident “goes a long way.” Yes indeed.
I was pleased to be alerted to a copy of Reputation Review 2012 by Rory Knight, chairman of Oxford Metrica. Years ago I used some of their research in my book on CEOs and particularly on how CEOs can build their reputation or kill it when crisis strikes. Knight just completed his annual reputation review for AON, the global risk management, insurance and reinsurance company, and as I expected, the report has insightful and timely information for those seeking to better understand the impact of crisis on a company and its bottom line.
Knight reviews the top crises of 2011 such as TEPCO, Dexia, Olympus, Research in Motion, Sony, UBS and News Corp, among others. His company looks at the recovery of shareholder value following crisis. Among 10 crisis-ridden companies in 2011, only News Corp found itself in positive terrain afterwards. In fact, what they found was that 7 of the top 10 lost more than one third of their value. Two companies lost nearly 90% of their value. These companies clearly had to put big restoration processes in place afterwards and I would suspect paid good dollars to firms to restore their good names and overlooked other everyday business to move forward. Oxford Metrica says: “Managing the restoration and rebuilding of reputation equity is an essential part of the value recovery process following a crisis. Reputation equity is a significant source of value for many companies and a coherent reputation strategy can be the difference between recovery and failure.”
The big takeaway from the report, or at least what seems to resonant with me, is that there is an “80% chance of a company losing at least 20% of its value (over and above the market) in any single month, in a given five-year period.” Those odds are not good and as Knight says, screams for having a careful and well thought out reputation strategy in place before a minor event turns into a raging crisis and monopolizes headlines, offline and online. A solid reputation strategy will also help guide the reputation recovery process which is often too hurried. This is the kind of advice that I write about in my book on reputation recovery and underscores having a strategy so you do not find yourself in this situation in the first place. Additionally, Weber Shandwick’s stumble rate of 43% for the world’s most admired companies tracks with Knight’s high rate of expectant reputational downfalls. It is not good at either rate.
The report outlines a process for managing a company’s reputational equity. They are 1) Measure your reputation through benchmarking and vis a vis your peers; 2) Identify the drivers of your company’s reputation in order to allocate resources properly; 3) Prepare a strategy for recovering your company’s reputation; and 4) monitor your reputational equity often and respond accordingly when risk emerges.
The report analyzes the reputational losses of Olympus and Research in Motion after their reputation-damaging events. It is worth reviewing. It also takes a look at the financial results from TEPCO after the tsunami hit Japan. Apparently, 90% of TEPCO’s value was lost, over $US37 billion. Oxford Metrica estimates that events associated with mass fatalities have double the impact on shareholder value than do reputation crises in general. I believe they are right. BP’s Gulf of Mexico tragedy which involved over two dozen deaths wiped off substantial shareholder value off their books.
Where I wholeheartedly agree with Knight is when he talks in the report about the impact of senior management on crisis and the need for that management to lead with transparency and openness.
“For mass fatality events particularly, the sensitivity and compassion with which the Chief Executive responds to victims’ families, and the logistical care and efficiency with which response teams carry out their work, become paramount. Irrespective of the cause of a mass fatality event, a sensitive managerial response is critical to the maintenance and creation of shareholder value.” One of the takeaways from the report is that winners and losers, reputationally, can be determined by how the CEO responds to the crisis.
The report contains an article by Spencer Livermore, Director of Strategy, at Blue Rubicon, a reputation consultancy. He quotes a stat that is dear to my heart, “Oxford Metrica’s analysis shows that companies which open up more following a crisis and tell a richer, deeper story are valued more highly, increasing share price by 10 per cent on average over a year.” He calls it the communications dividend which comes from investing in communications. Years ago I wrote an article for Ernst & Young’s Center for Business Innovation called Communications Capital and the idea was similar – the right communications can increase market value and strengthen reputation. As Livermore says, “We can make communications worth hundreds of millions more simply by making them better understood.” Having the right compelling narrative built on a well thought out reputation strategy is worth its weight in gold today.