Stumble Rate

Weber Shandwick’s annual calculation of reputation loss – the “stumble rate” – finds that a few more of the world’s largest companies retained their esteemed status as their industries’ #1 most admired company during 2012. This is good news.

Each year Weber Shandwick measures the rate at which companies lose their #1 most admired position in their respective industries on the Fortune World’s Most Admired Companies survey. We call this the stumble rate. Between 2012 and 2013, 46% of the world’s largest companies experienced a stumble, slightly down from last year’s 49%. These companies did not have too great a stumble, however. On average, they dropped two places, falling from number one to number three in their respective industries. However, for those companies that did fall from their perches, the loss is agonizing. Boards of directors and CEOs will want to understand why their reputations eroded and why their competitors leaped upwards. Explanations will be in order.

Of course, the bright side of the coin is the non-stumble rate of 54%. This means that more than half of the industries in the Most Admired survey boast companies with durable reputations.

In addition to calculating the stumble rate, we also dig through the data, including the nine drivers of reputation, to glean some interesting insights about stumblers and non-stumblers. A stumbler is an industry whose top company last year is no longer the top company this year. What is interesting this year?

• 22 industries (out of nearly 60, give or take depending on the year) have never had a stumbler since we started monitoring the stumble rate in 2010. The most admired companies in these industries have been stalwarts of reputation: Automotive Retailing; Building Materials-Glass; Computer Peripherals; Consumer Food Products; Electric & Gas Utilities; Electronics; Entertainment; Household & Personal Products; Information Technology Services; Property & Casualty Insurance; Internet Services & Retailing; Metal Products; Mining, Crude Oil Production; Oil & Gas Equipment Services; Pipelines; Newspapers & Magazines Publishing; Railroads; Semiconductors; Apparel Retailers; Diversified Retailers; Food & Grocery Wholesalers; Office Equipment & Electronics Wholesalers.
• 13 industries have stumbled at least three times since 2010. The most volatile, with four stumblers each, are: Airlines, Energy and Life & Health Insurance. Those with three stumblers are: Computer Software; Consumer Credit Card & Services; Financial Data Services; Food & Drug Stores; Medical Equipment; Motor Vehicle Parts; Petroleum Refining; Telecom; Tobacco; Health Care Wholesalers.
• No one particular driver of reputation took a big hit or could be said to be the culprit for reputation erosion. The worst average declines among drivers across all stumblers were experienced only by two drivers – management quality and long-term investment. All other drivers declined by just one ranking position, on average. Perhaps some stabilization on what positively and negatively affects reputation is taking hold.
• However, four stumblers lost rank on all nine drivers. The hardest hit was the Airlines industry. The company that stumbled took the greatest blow on its quality of management driver (dropping 6 ranking spots). Ouch. Other hard-hit drivers for this company were innovation, social responsibility, long-term investment, product/service quality and global competitiveness (a loss of 5 positions on each of these qualities). The company that supplanted this stumbler improved on all of its nine drivers in impressive fashion, rising at least two rankings positions on each driver and four spots on two drivers (financial soundness and global competitiveness). This does not mean that this new “king of Airlines reputation” will necessary remain so…this particular company was also tops two years ago and, as discussed earlier, Airlines is among the three most volatile industries.
• From zero to hero in 12 months. One stumbler lost its enviable top position to a company that is a newcomer to the World’s Most Admired evaluation. This goes to show that even the most reputable companies need to be on guard from all angles – not just their traditional competitors.

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 to say that the headline in today’s WSJ re the $2 billion trading loss at JPMorganChase strongly resonated with me. The title is “J.P. Morgan Trades in Its Crown.”  In our research on safeguarding reputation, we start out by summing up reputation failures among the world’s most admired this way:

“The last decade has seen many of the world’s most admired companies descend from their once lofty positions. They were in a class by themselves — corporate reputation royalty whose invincibility was universally accepted by business executives around the globe. No one could have predicted that these companies would ever part with their crowns. How the world has changed!”

It looks like we now have another major kingpin to add to our Weber Shandwick “stumble rate” analysis that we calculate every year. You can find more about it in an earlier post.  But…between 2011 and 2012, 49% of the world’s largest companies experienced a reputational stumble, up from last year’s 43% but exactly the same as 2010’s rate.  There seems to be no more untouchables among the Fortune 500 with this recent news.

I was also intrigued by Jamie Dimon’s remarks about what he could have done differently to have caught this $2 billion blunder earlier. Dimon’s deadpan answer was paying more attention to the “newspapers” among other things. He was referring to earlier reports in the papers about the trading problem. Have to hand it to him for taking the blame and being brutally honest in his response. He’s been true to his reputation on that count.

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought.”

Another side note of interest is that this reputation crisis did not start in social media. It has certainly taken off online but as far as we know now, there’s been no social media assault that instigated this crisis. No online cloak and dagger here.

Will be interesting to see how this pans out reputation-wise. Will this tarnish the bank’s reputation for the long-term or just be a stain? No doubt it will be headline news for a while. Dimon is eminently quotable –the WSJ has his most notable quotes already listed. I hate to have to say it but another one hits the dust.

There’s no avoiding the bad odds of maintaining a coveted top shelf reputation spot in one’s industry. Each year Weber Shandwick measures the rate at which companies lose their #1 most admired position in their respective industries on the Fortune World’s Most Admired Companies survey. We call this the “stumble rate.” Between 2011 and 2012, 49% of the world’s largest companies experienced a stumble, up from last year’s 43% but exactly the same as 2010’s rate.  With 1-in-2 companies losing their enviable industry position during the past year, the stumble rate highlights just how difficult a good name is to keep.  Looking at this finding another way, #2’s have good odds of becoming #1’s in their industry. Either way, reputational equilibrium is hard to keep. Companies have to continually manage their reputations and watch out for vulnerabilities. Perhaps companies should apply “stress tests” in the same way they are applied in medicine — determining how the organization’s core equity responds to external stress or crisis in a controlled environment. Very much like scenario planning.

2012 Reputation Stumble Rate from

Fortune‘s Most Admired Companies Survey

The industries that have the same #1 this year as last year are:  Aerospace & Defense, Beverages, Computers, Consumer Food Products, Delivery, Electric & Gas Utilities, Electronics, Entertainment, Food Services, Health Care: Insurance & Managed Care, Health Care: Medical Facilities, Health Care: Pharmacy & Other Services, Home Equipment & Furnishings, Information Technology Services, Insurance – Property & Casualty, Internet Services & Retailing, Mining, Crude Oil Production, Network Communications, Pharmaceuticals, Securities, Semiconductors, Soaps & Cosmetics, Specialty Retailers: Apparel, Specialty Retailers: Diversified, Superregional Banks, Trucking, Transportation & Logistics, Wholesalers: Diversified, and Wholesalers: Office Equipment & Electronics.

Seven industries have had a new number one each year since 2009. The industries with the most churn are Airlines, Energy, Food & Drug Stores, Life & Health Insurance, Motor Vehicle Parts, Telecom and Tobacco. During the past three years, a total of 40 industries have seen at least one stumble, so with nearly 60 industries represented on the ranking each year (it varies year to year), few are immune to reputational stumbling.

We also looked at the rankings within each of the nine reputation drivers that survey respondents assess companies on to help understand why companies stumbled. Of the stumblers between 2011 and 2012, we learned that…

• One stumbler experienced a ding to just one of its drivers. Sometimes it just doesn’t take much when you have strong reputational competition.
• Two stumblers lost ranking across all nine drivers.
• The most pervasive loss of reputation was in the areas of Use of Corporate Assets and Social Responsibility. Nineteen stumblers’ rankings went down on these two drivers, followed closely by Management Quality with 18 stumblers losing rank on this driver.
• What may have degraded perceptions of these drivers? A 2011 media analysis of the largest drops suggest that survey takers may have been sensitive to management changes (e.g., one CEO step-down announcement considered by analysts to be too far in advance of his intended departure date and one long-term CEO retiring) and management of assets (e.g., property spin-offs and failed asset funding). As for social responsibility, no stumbler experienced particularly steep drops on this driver so nothing reported in the media popped as a clear reason for the dings. Perhaps CSR activities are once again being more closely scutinized by peer survey takers as CSR becomes expected behavior.
• The driver least damaged was Global Competitiveness with 12 stumblers losing position.

Totally agree. Just read an article about teaching reputation management in business schools. I gather it is not happening. Actually, this topic has been circulating for as many years as I have been in the field of reputation management. How is it possible that nothing has changed?  An analysis of highly ranked MBA programs by the Public Relations Society of America (PRSA) found that only 16% offer a single course in crisis management, strategic communications, public relations, or whatever on a company’s most competitive and valuable organizational asset — its reputation. With all the reputation failures we have seen over the past decade or more – starting with Enron, it is hard to believe that business schools are still treating communications as an elective, if at all. [Weber Shandwick's "stumble rate" shows that nearly one out of every two companies lost reputation in their industry last year.  Isn't that enough reason to teach MBA students how to communciate to avoid such reputation disasters?]

The article written by Anthony D’Angelo rightfully says: “One can’t blame organizational leaders for not understanding that the way they operate the business is inseparable from the way they communicate about the business, inside and outside the organization. They’re not educated sufficiently to know these are inextricably linked leadership requirements: You can’t have effective leadership without an effective communications strategy. The latter is based on authenticity and transparency because nothing else works.”

Communications is a requirement of good governance and smart leadership. New CEOs understand very well today the importance of communicating internally when they confront their first 100 days.  Nearly all those I have worked with are eager to communicate with employees and desperate to do it well. There is always a perception that the prior leadership did not do enough to communciate the strategy or to movitate and rally employees. But when does” communications amnesia” set in if they are all so eager on Day One?  It is too late to get the communciations bug when crisis is on the doorstep.

Reputation or communications management is sorely needed in business schools today. What’s keeping it away? Is it the perception that communications is all about excuses and spin? Responsible communications needs to be taught.

I am in a big believer in being prepared for reputational damage or crisis. My book on Corporate Reputation: 12 StepsTo Safeguarding and Recovering Reputation is all about learning from crisis and being ready for the next one.  As Weber Shandwick’s most admired stumble rate declares, every company should plan on some reputational mishap or misstep in the future. Nearly four in 10 companies have lost reputational status in the past year. I just read an article sent to me about the National Preparedness Leadership Initiative at Harvard. The initiative’s goal was to learn lessons from leaders who have faced crisis situations such as terrorist attackes (Israel, Madrid, London), natural disasters (Hurricane Katrina), health scares (pandemics), oil spills (Deepwater Horizon), etc. 

One of the first lessons they uncovered applies to companies and institutions and is:

“…that bad leadership – much like smoking – is a public health risk factor. Whether in the aftermath of a terror attack or a natural disaster, we have seen that when leaders don’t perform well lives are lost and people abandoned.”

And the second lesson is getting everyone on the same page so everyone can work quickly, effectively and efficiently on behalf of a common and shared goal. 

“Working together after a disaster requires forging bonds before a disaster.” 

Third, and a powerful lesson for companies, is to “expect every citizen to participate.”  Leaders have to listen no matter how soft or weak the signals are. And these early warning signs need to get to those who can act and whose job it is to protect reputation. Empowering employees is critical to averting reputational disaster. As the National Preparedness Leadership Initiative found, “citizen bystanders” can make all the difference as we saw with the shoe bomber and underwear bomber airline incidents of the past few years.

“We should regard these heroes as leaders in their own right.”

 Each year Weber Shandwick measures the rate at which companies lose their #1 most admired position in their respective industries on the Fortune World’s Most Admired Companies survey. We call this the “stumble rate.” Between 2010 and 2011, 43% of the world’s largest companies (22 in absolute) experienced a stumble, down slightly from last year’s 49%.*  While this marginal improvement is a positive sign for the stabilization of reputation, the fact that 4-in-10 companies lost their enviable industry position during the past year highlights just how difficult a good name is to keep.

 A few things distinguish reputation stumblers from non-stumblers:

• Reputation stumblers had more CEO transitions or changes. Those companies that lost reputational status had more CEO transitions and retirement announcements during 2010. This is perhaps not surprising since change at the top can signal that a company is in turmoil or that a new strategic direction has been set.  On the other hand, rankings may be very sensitive to the uncertainty of any CEO transition – voluntary or not.
• Reputation stumblers underperformed non-stumblers in terms of financial performance. Stumblers’ average share price rose 9.5% year over year compared to the 21.2% for non-stumblers . Although it might seem confusing that stumblers’ share price rose, it is important to recognize that stumblers are most admired companies.
• Reputation stumblers did not lose admiration for any one particular reason. Stumblers lost reputational equity for a variety of reasons such as governmental investigations, bad loans, poor returns on mergers/acquisitions or issues related to the housing market.  No one reason appeared to stand out.

Reputation Drivers Most Affected

Weber Shandwick dug deeper into Fortune’s nine reputation drivers to explore possible reasons for stumblers’ loss of reputational esteem.  Of the 22 stumblers, we found that:

• The most pervasive loss of reputational equity between 2010 and 2011 was in the area of “wise use of corporate assets,” perhaps a sign of the challenging times. This attribute was the most frequently dinged by survey respondents – industry peers, financial analysts and board members. 
• Other factors that appeared to affect the overall stumble rate were perceptions on  “people management,” “management quality” and “long-term investment value.” The rankings of 15 stumbling companies on each of these factors dropped since 2010, possibly reflecting a lack of confidence in a company’s overall long-term strategic direction.
• The least damaged driver during 2010 for stumblers was “financial soundness.”  Only 8 of the 22 stumblers lost credit on this attribute, perhaps because of an improving economy and/or raters cut their peers some slack, recognizing how hard it’s been the past few years to grow a business.  

*Fortune reports 22 companies out of 57 industries experienced “tumult” (p111, March 21, 2011 issue). A reader would interpret that as a 39% stumble (22/57). Since Weber Shandwick is tracking the rate over time, our base of industries needs to include only those that are reported year over year. For example, the Packaging/Containers industry was not reported in 2010 so Weber Shandwick excluded it from the total 57 industries reported in 2011. In total, six industries were excluded for the 2011 stumble rate to net a base of 51 industries (22/51=43%).

 I know many of you do not stay awake worrying about what your company board is up to but it is definitely important if you think about it some more. No surprise that boards are talking alot about the economy and challenging times in this meltdown. However, a survey by Eisner LLP asked over 100 board members what they were worrying about besides the bottom line.

At the top of the list was regulatory compliance — 63% chose this worry to keep them awake.  Second on the list was reputational risk. With all the corporate reputation damage evident today (see more on Weber Shandwick’s stumble rate), it makes sense that board members would be asking how vulnerable their company reputations are as well as their very own.  One of the shifts I like to mention when I talk about reputation trends is how board members have to worry extensively today about how their reputations are impacted by reputational missteps and disasters. There are many companies that come to mind in the past two years where it was a legitimate question to ask who was on the board and what were they thinking (or not thinking).  As the article in CFO.com agrees, “Boards are concerned about their companies’ reputations, but also their own reputations,” says Steven Kreit, co-author of the study. “More and more you see that when something happens at a company, people are saying, ‘Where was the board?’” Great question. In fact, I typed “Where was the board?” into Google just now and got nearly 7 million hits. Wow. A good question to be asking.

    Barron’s released its list of best CEOs this past week.  I thought one of the criteria for making the list was telling — identifying CEOs who kept their companies out of trouble. As we have reported before on this blog, nearly one out of two companies stumbled and lost their industry #1 status in the Fortune World’s Most Admired Companies report this year (Weber Shandwick’s Stumble Rate).  No doubt about it, 2010 will be the year of Reputation Rebuild. I’m ready for it.