risk management

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.

Took me a few days but finally found a chance to read a fascinating review in the Financial Times of the impact of the insider trading scandal at management consultant McKinsey & Company and its impact on their reputation. Andrew Hill did a fine job providing a historical review of McKinsey’s ups and downs over the many years of its storied existence and finding former partners and employees to offer their perspectives. As you already know from the trial of Raj Rajaratnam of Galleon Group, the hedge fund CEO is accused of insider trading using tips from former McKinsey partners’ Anil Kumar and Rajat Gupta, global managing partner who left after several terms in 2003.  What intrigued me of course was how McKinsey was recovering from this reputation catastrophe and how it fit with the best practices in my book on reputation recovery. This is not just a bruise but a serious injury to McKinsey’s reputation. Here is what they did so far:

• Communicated regularly with employees and former employees
• Initiated an independent inquiry with the help of a law firm
• Improved processes over protecting confidential client information
• Reviewed its ethics policies and standards
• Redefined what constitutes ”material non-public informtion”
• Built a formal “stop-list” of client stocks that no McKinsey person can trade (not just those assigned to the account)
• Added new training procedures
• Strengthened governance

True to its highly analytical way of attacking corporate challenges (they work for 90 of the top 100 companies in the world, among others), they looked back at how they handled prior problems. Coincidentally, the article points out that they had been putting together a comprehensive internal history of the firm which luckily offered them insights on how they have historically dealt with challenges to their reputation and livelihood. The latter best practice is one I highly recommend to others. In my book, I talk about the importance of the Rewind period where companies study their mistakes to from the past to create a better future. Lord John Browne of BP did so after the refinery fire in Texas City and asked the question of how they did not see the pattern of errors that turned deadly sooner. Looking in the rearview mirror may take time that leaders do not think they have but critical warning signs are often present. Retromining is a critical piece of recovering reputation. As the new McKinsey global managing director, Dominic Barton, also did, he studied other thriving cultures that failed. As Barton said in the article, he had been “thinking what happened with the suppression of the Jesuits in the 1700s. This may seem strange, but [it was] an organisation that was thriving and doing well and all of a sudden was severely challenged.”

  Just returned from a multi-city tour of Europe where my colleagues and I talked about socializing your brand. This was based on our (Weber Shandwick) new recent research. We spoke to many clients and prospects about digital communications and the rewards and risks that come with this new territory.  Someone asked how you balance the reward-risk ratio when your senior management does not recognize that digital is so important to reputation today. In fact, our research found senior marketing/brand/comms executives saying that over half (52%) of a brand reputation today is attributed to how social it is. And this figure is expected to grow exponentially as time goes by. This gentleman said that being a social brand is akin to surfing with sharks. I loved the analogy because it explains how great it can feel to employ digital to communicate and give voice to a brand’s story and yet how unexpected it can be when you feel that shark ripping into your reputation.

The answer of course is being prepared. That’s what the best of companies do. Crisis readiness gives you the head start you need today, in both a digital and non-digital world. Reputation is increasingly hard to manage while swimming with the unknown.

  I just recently saw the term “reputation laundering” in an article I was reading on the plane (which is where I seem to spend alot of time these days). I always like to mention new phrases that involve the word reputation. It is one of my favorite pursuits (which is pretty pathetic if you think too much about it). So I went to search for the term to find the article again and came across over six thousand mentions of the term.  The Guardian seemed most closely associated with the term because of their reporting on the practice in the UK, so they say.  What is it? It is the practice by institutions or individuals to disguise the source behind wrong-doing. Not a good thing. Just thought I’d call attention to the phrase in case anyone else found it interesting.

On another note, a colleague sent me an example of reputation response and recovery (thanks J). It an interesting interchange from the CEO of Deutsche Bank. Apparently Foodwatch approached Germany’s largest bank to warn them about the bank’s speculation in the agricultural market that they said was increasing hunger and poverty worldwide. Now what was different here is that the playbook changed. The CEO — Josef Ackermann — rarely responds to these types of criticisms.  At first, the bank rejected the accusations in Foodwatch’s report and petition. But in short order, the CEO responded in a letter to the head of Foodwatch by saying he shared their concern and would review the bank’s activities in the trading of agricultural commodities: “I share your sadness that so many people on our planet continue to live in poverty and must go hungry.” And Ackermann wrote in his letter:

“No business is worth risking the reputation of Deutsche Bank.”

Interesting to hear that The Wall Street Journal is outright asking subscribers how the Murdoch scandal at News Corp might be impacting its own reputation. Many companies prefer not to bring up an issue they are facing, even when it is often the elephant in the room.  Some companies, however, think that surveying customers about an issue or self-inflicted crisis is a smart way to demonstrate that they care enough about their reputation to ask the tough questions or they simply want to know in the name of transparency.  Apparently the WSJ is asking subscribers, of which I am one, “What impact, if any, do the illegal acts by News of the World journalists have on your impression of The Wall Street Journal?” or something close to that. And my favorite question from what I have read this morning is whether the CEO of a company should be held responsible “for all the actions of all its employees, no matter how large the corporation is” on a 1 to 10 scale (disagree completely —>agree completely).  I think I know the answer to that one. My guess is that 75% to 85% of subscribers, AKA business executives, will give this statement an 8/9/10.  All in all, as my colleague said to me….a brave move.

One of the reasons that reputation has become so complex has to do with the vast portfolio of stakeholders that companies are asked to engage with. Years ago, companies primarily worried about financial analysts and labor unions. Today the stakeholder audience is deep and wide, ranging from one to many. Some companies have to consider the entire general public and others only 25 people whose opinions and perceptions count. The question that often arises is what’s external engagement worth?  For that reason, I like what I read in some research by Witold Henisz at Wharton, Sinziana Dorobantu, senior research fellow at Wharton, and Lite Nartey at University of South Carolina (“Spinning Gold: The Financial Returns to External Stakeholder Engagement”) As they said, external engagement pays.  “The researchers’ goal was to figure out what role these stakeholder events played in companies’ efforts to maximize profits. The answer: a very large role.”

The researchers looked at 26 gold mines over a 15 year period and coded over 50,000 stakeholder events covered in the media.  Stakeholder events included actions or expressions about cooperation or conflict with mine owners.  As for stakeholders, they included just about everyone…”local and national politicians and community leaders to priests, war lords, paramilitary groups, NGOs and international bodies like the World Bank.”  The researchers designed a stakeholder index that revealed the level of stakeholder cooperation or conflict. Communicating and building bridges with their stakeholders led to profitability according to the researchers’ anlaysis.

“We found in our research that the value of the relationship with politicians and community members is worth twice as much as the value of the gold that the 26 mines ostensibly control.”

 Stakeholder engagement and cooperation helped companies deliver on budget and in a timely manner leading to competitive advantage and profitability. When cooperation was blocked, they found that mines were are open to delays, unrest and additional costs that led to closure or suspension. 

“It used to be the case that the value of a gold mine was based on three variables; the amount of gold in the ground, the cost of extraction and the world price of gold,” he states. “Today, I can show you two mines identical on these three variables that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn’t.”

This research can be applied to other industries and does a fine job of making the case for engagement and dialogue.

A reputation for cooperation and meeting stakeholders half way at least is critical. It is good to have data to back up the importance of minimizing conflict and its link to financial performance but I agree with the authors who say “it is not just corporate social responsibility, but enlightened self-interest.”

The second survey of Board Directors was just issued. The survey is conducted by Eisner Amper, audit, tax and business advisory professionals. They used their database and NACD’s Directorship magazine’s subscriber list of corporate directors. The survey reports on the opinions of 142 directors representing publicly and privately-held companies. 

One of the questions they asked was which risks are most important to their boards, that is, besides financial risk (which probably begs a 100% answer!).  The chart is below. At the top of the list is reputational risk — 69% said this is most important today. Reputational risk surpasses regulatory compliance risk (61%), CEO succession (55%) and IT risk (51%). I would posit that if this survey was done in the past few weeks, IT risk might have jumped up higher as a factor of major concern. The hacking and hobbling of computer networks at Boeing, Sony and the White House gmail accounts have had to certainly affect risk management concerns at board level.  With regard to security risks, Eisner Amper wisely says: “The tools of today’s business heavily revolve around information technology, the Internet, the speed and degree of data transmission, and the pervasiveness of social media.” And everything that affects business affects reputation.

Another question they asked which I like was where board directors go to for new information. In the 2011 survey, the leading sources were company management, publications, Internet, accounting/advisory firms and conferences (at 33%).  I liked seeing the importance of conferences among the other sources because I firmly believe that getting out of the office and listening to other points of views provide opportunities for thinking beyond the same old ways about the same old problems.  I wish I did more of this myself.  We all need to close the door on our silos. For board members, this is a good sources considering how the problems they face have to be on high boil these days.

At the end of their executive summary, Eiser Amper concludes:

“Protect. Protect. Protect. Reputational risk needs constant monitoring and analysis of the broader issues…Brand, company and personal reputation can change overnight. The speed of today’s business was unimagineable in years past, but its impact is real and protection is the name of the game.”

As the new year approaches, I decided to assemble my thoughts on what’s ahead in the world of reputation for 2011. I posted eight trends on HuffingtonPost that I see emerging and taking hold over the next 12 months. You will have to check out the post to see what I said about each (my way of saying please check it out). Here they are.

1. Hijacked Reputations

2. Reputation Recoverers Anonymous

3. Reputation Warfare

4. Online Reputation Revisionism

5. Ascendancy of Social CEOs

6. Reputation Blacklisting

7. Reputation Risk Insurance

8. The Corporate Brand Rises

The original title of the post is Ask the Magic-8 Ball: Reputation Trends for 2011.  HuffingtonPost shortened it to make it more clear (they are right). However, the Magic 8-Ball is a toy that I used to play with when I was little and which is still around. Here is what Wikipedia says about the toy:

The Magic 8 Ball is  a toy used for fortune-telling or seeking advice, manufactured by Mattel. The Magic 8 Ball is a hollow plastic sphere resembling an oversized, black and white 8 ball.  Inside is a cylindrical reservoir containing a white, plastic, icosahedral  floating in alcohol with dissolved dark blue dye. The die is hollow, with openings in each face, allowing the die to fill with fluid, giving the plastic die minimal buoyancy. Each of the 20 faces of the die has an affirmative, negative, or non-committal statement printed on it in raised letters. There is a transparent window on the bottom of the Magic 8 Ball through which these messages can be read.

Ask The Magic 8-Ball is the perfect ending to a difficult year threatened by a poor economy and many unsettled issues that still afflict populations around the world. The question for the Magic 8-Ball is “Will 2011 Be Better than 2010?”  Pick one of  the 20 standard answers below that appear on the Magic 8-Ball for what’s ahead. I picked the fifth one — Outlook GOOD. Happy New Year!

? As I see it, yes

? It is certain

? It is decidedly so

? Most likely

? Outlook good

? Signs point to yes

? Without a doubt

? Yes

? Yes – definitely

? You may rely on it

? Reply hazy, try again

? Ask again later

? Better not tell you now

? Cannot predict now

? Concentrate and ask again

? Don’t count on it

? My reply is no

? My sources say no

? Outlook not so good

? Very doubtful

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

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

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