risk management

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.

I have had China on my mind lately. Weber Shandwick just announced the launch of a new specialty called Emergent China. It advises China-based multinationals and their CEOs on strategic expansion into global markets, including North America, Latin America, Europe, Africa and the Middle East. So I have been more attentive than usual to how Chinese companies build their reputations outside China.

Ironically, as I was reading my Wall Street Journal this morning, I saw a paid advertisement taken from China Daily with the headline, “COSCO Enjoys Success.” The sub-head was “Chinese shipping titan earns respect and gratitude in U.S.”  I read the China Daily article about the robust and successful development of COSCO shipping operations in the U.S.  

Then I turned to the Marketplace Section of the WSJ and saw a fairly negative article about Cosco’s poorly timed expansion that was damaging its financial standing and its dominance.

Although my assumption is that Cosco tried to cushion the fallout from its reporting tomorrow on the first half’s earnings, the timing was unfortunate and not a good working reputation-building strategy. Reputation for emerging Chinese companies needs to be managed for the long-run and a better understanding of how the U.S. media works seems to be in order.  I can’t help but think that better relations with journalists would have helped Cosco with getting a heads up that this criticism was about to appear. I could be very wrong but the two articles (one paid, one not) just screamed for REPUTATION MANAGEMENT.

I give them the benefit of the doubt because they seem fairly savvy. I had noticed two years ago that Cosco was using its Awards and Recognition effectively on their web site. When I was visiting China to talk about reputation, I used their site to show how Chinese companies were using these rankings wisely. So let’s see what happens as more Chinese companies make waves in the U.S. and communicate their positioning and initiatives.

Some good points on how to protect reputation from Bloomberg BusinessWeek. The article reminded me of the piece I wrote for HBR, Reputation Warfare. My article made the point that companies no longer have to just sit there as their reputations get pummeled. There are strategies that can be deployed to get your side of the story on the record. Plus it always helps to respond in the same format (YouTube, Facebook, blogs, etc) as your opponents. This BusinessWeek article by Felix Gillette says: “If there’s any solace to shareholders, in the endless push-and-pull between company critics and corporate defenders, the media environment seems lately to have handed an unlikely advantage to brands.” Gillette makes the point that brands can create their own messages now and get them out in defense. So what can a company do to protect its reputation and get its point of view across as swiftly as their biggest critics. Here are a few pointers that are discussed in the article:

1.  Craft Your Brand Image in Peace Time. Get your content ready to go during quiet times and push it out aggressively when the spotlight is on your company. “The idea of producing a bank of preemptive content—about how we produce our food, how we pay our employees, how we run our diversity policies—and then activating them with paid media at the moment that the controversy arrives is almost a prerequisite strategy for everyone now,” says a media buyer CEO.

2. Buy Ads & Keywords on Google that counteract boycotts or protests. If you search for BP oil spill on Google, you will come across a site from BP on their preparedness. Get those sites up and ready before you need them.

3. Do a vulnerability audit before crisis strikes. Plan ahead of time for your deficits and what you need to do to defuse the situation when it happens. Vet yourself. Most crises are self-inflicted and companies know ahead of time what their weak links are. There really should be no surprises.

4. Get your Advocates in order. This again is good old common sense. Make sure that you know who is likely to defend you in time of need. Keep in touch with your supporters. Today I saw the CEO of TDAmeritrade quoted saying a few good things about trading group Knight Capital who practically melted down this week when their computer system went amok executing trades.

5. Get your monitoring software in place. The article points out that having the right monitoring software in place can now help companies know how many people are actually expressing outrage over an event and whether the anger is rising or falling. As we all know, the news cycle is less than 12 hours today so maybe those 10 critics are going to move on to the next fiasco. If you can measure it, you can manage it.

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

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

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

Enjoy the Oscars if you are watching tomorrow!

Beautiful morning here in New York. I even hear the birds chirping, almost like Spring. However, for me, it is a sit-down day. I am working on an article which I will tell you more about later but I am looking at many hours in front of my laptop as I draft away. I already started my list of what I want to do when it gets done in a few short weeks. When I wrote my books and other articles, I started a similar list that contains all the things I want to do on an ordinary Saturday or Sunday like see a movie, go out for dinner or lazily walk in the park.  Anyhow, back to my blog post. I have my own reputation and risk to manage with this article looming before me.

I kept an advertising insert from a few weeks ago because it had a few good stats on reputation. It was on Risk Management, a favorite of mine because reputation often comes up.  It was written by Joe Mullich. I am unable to find the link, apologies. A few interesting facts:

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

I particularly liked #3 above because we found a similar trend in our recent study on the importance of the corporate brand behind the product brand. And this quote intrigued me….”The higher the cost of the purchase and the more that translates into a long term relationship, the important reputation becomes.” I think that is exactly right. When consumers are buying big ticket items or even medium sized ticket ones, the relationship is deeper and the consumer wants to get it right. They want to invest their dollars with a nod to doing right and supporting companies that treat employees right. The big shift however is that consumers feel this way about the company behind the brand for smaller, everyday purchases.

The article also mentions how insurance companies are introducing reputational risk or crisis management insurance policies (something we know about) and interestingly, that there is a new data terminal that incorporates a reputational risk indicator “which allows investors to identify the severity of criticism and negative press coverage directed toward individual companies and market sectors.” That’s new to me and quite interesting. Perhaps it is one of those predictive systems that advise companies on emerging threats that we have seen as more clients are being proactive vs. reactive.

Just was forwarded an interesting study out of Northwestern’s Kellogg school. It found that the share price of a company that is being boycotted drops nearly one percent for EACH day of national print media coverage. Ever wondered what happens when those protesters zero in on your company and tell people not to buy your products? Often I will hear the response, “The boycott is not affecting our sales so let’s not worry too much about this.”  However, the research uncovered that perhaps your sales are not being affected, but watch out for your reputation and stock price. Assistant Professor Brayden King found that Day One may not be as much a problem (decline of one half of one percent in share price) but there is an average decline in share price of 0.7 percent for EACH day afterwards that the company remains in the national print media spotlight.  After looking at 177 firms who were boycotted over several years (1990 to 2005), King concludes that there is a clear link between reputation and media coverage. And when you think of today with the Internet, whoah.

I liked this fact — about 25% of those companies generated a concession from the targeted company.  What does that say about the other 75%? Perhaps there are some behind the scenes negotiations that we are not privy to. And clearly companies stuck to their position if they felt they were right.

Also liked this fact. King used the Fortune Most Admired Companies ranking (one of my favorites) and found that boycotted firms with a high reputation ranking generated 4.4 times the coverage generated by boycotted firms that were unranked, three times the coverage of those in the lower quartile and six times those in the middle ranking group. Essentially, the bigger you are and the more admired, the greater the coverage when boycotts land on your door. Like I often say, when you make it to the top of your industry in the Most Admired, you might as well paint a bulls eye on your back (or logo).

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

In this instance, the one brother hired Invisible Hacking Group located in China and here is how it works:

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

You get the picture.

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

A few interesting things crossed my mind and desk this week that I thought I would share. All reputation-related of course.

1. The World Economic Forum released its report on the top risks facing the world in 2012. Social unrest and income inequity were at the top. Natural disasters such as the earthquake in Japan were also high on the risk list. And as pointed out, one risk affects another creating a domino effect. “The Internet, meanwhile, can magnify and spread the effects of a disaster in other ways. Rumors, even if incorrect, spread quickly on social networking sites — sometimes more rapidly than emergency services can communicate accurate information. As word of disasters like the terror attacks of Sept. 11 or the earthquake in Japan spreads globally, consumers hunker down in front of their computer screens or televisions, rather than going about their daily lives. This increases the economic effects of a crisis, even in areas far removed from the source.”  Disasters such as the horrific earthquake, tragic 9-11, death-defying financial crisis, massive oil spills and nasty ash clouds coming from Iceland all heighten other risks in some way. And risk spells reputation damage depending on how a company or country responds and solves the problem.

2. The report from WEF also mentioned that risks are on the horizon as leadership transitions are in full force this year. It is not just the U.S. presidential election that poses risk and stirs up emotional angst. There are leadership transitions underway this year in France, Russia and China as well. Add to that the sudden transitions in the Arab world this past year and we see upheaval and uncertainty. When CEO transitions are underway, the first few months can be risky so as we see world leaders change, tighten your seatbelts. The public will be more socially active than ever. We’ve already seen that in Russia.

3. I’ve written here about rankings and so-called “worst of” lists where companies, CEOs and environmental records are put on notice that they are not making the grade. In most Januarys, TripAdvisor.com comes out with its “dirtiest hotels” in the world.  No more. The CEO Stephen Kaufer says, “We want to stay more on the positive side, so we’ll continue to feature the best destinations, the top hotels.  We’re slicing and dicing the ‘best of’ in different ways this year, more than focusing on the negative.”  Although the article where I learned about this says there were potential legal considerations and competitive reasons for abandoning the January list, it also mentioned that the original “worst of” list was done for PR reasons and that TripAdvisor is less interested in that now.  Perhaps there is a reputation-reason afoot here. There is so much negativity online on some of these sites and it is so easy to find what you are looking for that a list of the 10 worst may be hardly worth alienating visitors to your site. Everyone worries about the detractors and the praisers. Maybe it is time to just worry about the average site visitor who does not want snarky comments and lists, but just the plain old straight forward facts to plan a plain old relaxing get-away.