Posts Tagged ‘reputation damage’
When I travel to speak in different countries , I spend a good deal of time investigating the reputation of the country I am traveling to and any recent reputational problems they are experiencing. I always want to know what the biggest business scandal, best example of a reputation recovery and what were the most widely covered social media assaults on a business. I usually get asked to comment on these types of questions one way or another during a media interview or in a Q&A session and I like to be prepared.
On my last trip, I was all prepared to talk about Turkey’s issues with the protests in Gezi Park. But everywhere I turned, I was also asked what I thought about the reputation of the United States in light of the government shutdown? Did I think its reputation was being harmed? I have to say that I was somewhat startled by the question because I am always so focused on the country that I am visiting that I forget that it goes both ways. But this time, I realized without any doubt that the reputation of America was being seriously damaged abroad by the incivility and absurdity of the standoff. It felt awful.
This week, we saw something I have posted about before….how companies are increasingly becoming involved in political issues, sometimes against their own will. And this week we saw first hand another form of Starbucks Diplomacy. The CEO of Starbucks, Howard Schultz, posted a note on his company website deploring the shutdown — “Please join me in pleading for civility and a respectful, honest discourse among politicians to bring a solution to the current stalemate.” And today, another note about Americans coming together for the collective good and signing a petition demanding that Congress put an end to the shutdown. Since I really want to get our reputation back on track, I’m all for this.
The Arthur Page Society just issued a new report on The CEO View: The Impact of Communications on Corporate Character in a 24X7 Digital World. The 20 interviews with global CEOs reveals many insights on the evolving role of the CCO (corporate communications officer) in companies today. What is special about this report is that it provides a view from the very top, from the CEO himself or herself. In a section on what’s expected from CCOs in this brave new always-on world, one of the findings caught my interest because of the reputation angle. They refer to it as ”High-Resolution Measurement.” The report states:
Today, CEOs expect their CCO to deliver an accurate, data driven picture of their company’s reputation at a level of detail that is often very granular. Some CEOs report measuring as many as 30 different brand attributes as experienced by as many as 15 discrete stakeholder groups. While the levelof detail and timeliness demanded by CEOs vary, the new emphasis for 2013 is the demand for hard data.
It sounds to me like CEOs want it all because they now understand that the single employee loner or the most vocal customer detractor or the regulatory body in another country or the evolving patient group launching a new website or the members of a NGO group can easily harm the company’s reputation within seconds and make the damage last days, weeks or months. Instead of just worrying about how reputation is faring among a set portfolio of key stakeholders, CEOs now expect CCOs to be on top of those peripheral stakeholders that can rise up and reap havoc. Hard data has the potential to answer many of these questions. I always say that managing reputation by anecdote does not tell the whole story (or even some of it).
There are many more insights worth discovering in the report. Give it a read to understand how the role of the CCO is changing and how vital that position is to the company, the CEO and to the reputation universe.
The news story about the CEO held hostage in China by employees has me thinking about the potential next new uprising — employees. We’ve seen leaderless revolutions spring up everywhere around the world recently but we have not really seen employees take matters into their own hands like this. Of course we have labor unions that strike and protest but they usually have contracts with employers and have set rules for negotiations. Employee preceptions are such an important driver of reputation that any mishandling or media attention (offline and online) related to dissatisfaction can seriously damage a company’s reputation.
Going back to the hostage American CEO, Chip Starnes, of the specialty medical supply company based in Florida — he was held hostage in his office for several days because employees were worried he would not pay severance as the company laid off some workers to move their functions to India where labor is less expensive. The CEO bought the factory 10 years ago so this was not a new relationship although it is hard to tell what the relationship between employer and employee actually was. As hostage, Starnes spent some time being kept awake and hungry, all under less than ideal conditions. Starnes sent an alarming cellphone video of the situation to his brother showing employees gathered around an executive-like chair in the middle of a hand-drawn circle on the pavement outside his office cell. Once compensation for employees was properly negotiated, he was set free although he has not left China as employees await a check clearing for their employment packages.
On one hand, the CEO and his company’s reputation for doing business in China was damaged (perhaps not damaged but certainly placed in doubt) but I’d add that the reputation of the business environment in China was also placed in harm’s way. And all of this was inflicted by employees who rose up and took matters in their own hands. We’ve seen other employee-instigated anger at employers such as confidential leaks, badmouthing online and boycotts but rarely something this drastic. Employee as activist could unfortunately be the next reputation-damaging trend.
Many clients ask what is the potential impact of a crisis. How long will it last? When will the scrutiny die down? How does it compare to other scandals or crises? How much will it impact my reputation? When should we start the recovery process? The New York Times’ insanely smart Nate Silver who writes the FiveThirtyEight blog had an interesting post yesterday on which political scandal — the IRS targeting of conservative groups or the Benghazi attack in Libya — would be longer-lasting and possibly impact the next election cycle. Silver chooses the former (the IRS scandal) and explains so in his article. More importantly for my interests and for those that follow me was Silver’s five questions that he developed on whether a scandal “has legs.” He credits Bill James’ Keltner list for the initial questions. To determine whether reputational injury will be enduring, these questions are a good place for companies, leaders and others to start:
1. Can the potential scandal be described with one sentence, but not easily refuted with one sentence? Using the 140 character Twitter test is one good way to see if the scandal has legs. Can you say it in 140 characters. Or try it with as few as 16 words which if you recall is all it took to sink former President Bush in 2003 when he said in his State of the Union Address, “The British Government has learned that Saddam Hussein recently sought significant quantitites of uranium from Africa.” Silver’s argument that if it cannot be easily refuted in a similarly short string of words, you have a problem on your hands. I might add that it could be even less than one sentence…it could be a video or photo today.
2. Does the scandal cut against a core element of the candidate’s brand? The word candidate could be substituted for company or CEO. In this case, a company that proclaims transparency but is caught doing damage to the environment behind the scenes or engaging in financial manipulation is going to lose its credibility 1-2-3. Think about Enron and their much heralded reputation for innovation at the time. It turns out that their innovativeness was in their financial shenanigans, not in reinventing business processes that led to success. Even though Enron was long recognized by Fortune as one of the most admired and innovative companies in the world, the scandal essentially decimated that impression. In fact, it took its leaders from pinstripes to prison strips.
3. Does the scandal reinforce a core negative perception about the candidate? Or company/CEO in this case. As Silver says, “A scandal can be equally dangerous if, rather than undermining a candidate’s strengths, it reminds voters of what they like least about him.” I think that Congressman Anthony Weiner’s late night racy Twitter sexting reminded people of his unlikeability and brashness. Perceptions that confirm what you already thought of a person or company are hard to shake loose. Another example would be BP’s then CEO, Tony Haywood, who at the time said that he wanted his life back while oil was spilling into the Gulf of Mexico. Unfortunately, the general perception was that BP did not care about the damage being done to the environment by the oil spill and the CEO’s statement only reinforced that negative reputation.
4. Can the scandal be employed readily by the opposition without their looking hypocritical, risking retribution or giving life to a damaging counter-claim? Most competitors in business do not take advantage when their peers are knocked down by scanal. Companies today easily recognize that a scandal for one company affects all and impacts the entire industry. The question for company reputation is “Can this scandal spread to peers and further damage the industry sector that might already be struggling?” Not a perfect example I fear but an example that comes to mind might be the quality issues that emerged years ago in China when lead paint was supposedly found in children’s toys. That perception continues to linger for products manufactured out of China today. I was recently in a children’s store when a customer asked the cashier where a T-shirt was made because she only bought children’s clothing made in the USA.
5. Is the potential scandal occurring amid an otherwise slow news cyle? This is a good question to ask when a potential reputation disaster emerges. There are countless examples of company reputation debacles that get drowned out by other news that draw the media’s attention. I always think about how some recalls get scant coverage when bigger business stories are erupting. Or how some stories are not uncovered until the cycle is very slow and investigative reporting resumes. Silver mentions how the crude measure of a Google search shows that today, American’s appetite for political news stories is at an eight year low. So President Obama and the Democrats might just avert the sting from the IRS scandal because it’s not the tantalizing subject for readers as it might have been eight or nine months ago. Perhaps when the Dow is reaching 15,000, some stories just fade away.
What spooks markets the most? If you closely follow crises, you probably think about how many different types of crises there are. For example, how do the markets react to a crisis that is due to the questionable behavior of the company or employees? What about product recalls? Or litigation? What about loss of customer data? All good questions to ask about reputational damage. International law firm Freshfields Bruckhaus Deringer decided to investigate how the markets react to different crises and how long the crisis lingers. This chart below is from their study:
Behavioral crises (company or employees acting questionably or illegally) have the greatest short-term impact on shares and the only type where the companies have the possibility of regaining their market share after six months. However, they spook the markets the most and can cause shares to crash by 50% or more on the day they become public, according to the researchers. Investors, however, forgive these types of crises more quickly than others.
Operational crises (when the company’s functioning is halted due to a major product recall or environmental disaster) have a modest impact in the first two days of the crisis breaking but the greatest long-term effect on share price…down almost 15% after six months. One quarter are still down one year later. These type of crises strike fear in companies and reputations are hit for the longest period of time.
Corporate crises (companies where the financial wellbeing is affected such as liquidity issues or material litigation) made up more than one quarter of companies experiencing a share drop on day one. Most often, these companies recovered quickly.
Informational crises (when companies IT such as system failures or hacking) were of moderate concern to the markets. They did not fall more than 3% on day one. According to the research, none saw shares fall more than 30% within a year of when the crisis struck. Possibly, investors figure these can be resolved and its everywhere today, not necessarily at the core of the company’s business.
As the research states, “Our research shows that directors typically benefit from a window of 24 to 48 hours, during which financial market reaction to news of a major reputational crisis will be relatively constrained.” In the public relations world, we often refer to the first hour after a crisis breaks as the “golden hour.” According to Freshfields, it sounds like there is an even longer” golden window.”
The natural question to raise is why does operational crises do the worst? Freshfields answers appropriately, “Crises that strike at a business’ core have a greater long-term impact on share price as markets are more likely to lose faith in a management team that cannot resolve a crisis that is intrinsic to its operations.” As Oxford Metrica’s research in 2012 for AON showed, management response is showcased for all to see when crisis strikes. The kind of CEO or executive response can make or break reputations and create reputation loss of great magnitude if done poorly. To prevent such reputation loss, prepare!
Skins International Trading, maker of compression bodysuits for professional athletes, is suing the Union Cycliste International organization for harm to its brand reputation. They are saying that the UCI did not take the doping charges leveled at Lance Armstrong seriously enough and thereby tarnished the reputation of the sport and the brands that support the sport. This is a good example of how an individual with a damaged reputation can have a negative ripple effect on individual brands, events and sponsors that practically cripples an industry. Only time will tell how this ends. Hopefully a new generation of cyclists will emerge to remove the stain left by Armstrong.
Faking reputation. Hard to believe! YELP knows so. The review site says that 20% of reviews never see the light of day. They are considered either suspect or fraudalent. Some businesses even try to commission people to write reviews or bribe product users to write something positive. You can solicit these reivewers-for-hire people on craigslist. What gets me, however, is that there is an entire cottage industry of reviewers-for-hire who will write bad reviews that knock a business’s competition. An article in Ad Age last week presented a slew of facts that makes me wonder where this will all end – a Gartner study reported that fake reviews would grow to to nearly 15% in the next two years. They even forecast that the FTC will be taking a few Fortune 500 companies to court for faking reviews within the next few years. These reputation fake outs will weaken credibility of review sites when they’ve never been so important.
Starting this past week, YELP is going to shame businesses that pay for fake reviews to shine up their reputations. Read this article to learn more. By setting up a sting operation (the stuff of spy novels), YELP is said to be exposing eight companies by placing the following consumer alert on their profiles: “We caught someone red-handed trying to buy reviews for this business.” (See above picture for the real deal) Potential customers will see the incriminating e-mails trying to hire a reviewer. And don’t expect these alerts to go away soon. Definitely a red-faced moment if caught.
This all makes me think again about how important reputation is in this information age where everything is accessible and disclosable. Reviews that lead to positive and negative reputation are their own form of currency and wealth. The lengths to which businesses will go to protect or heighten their reputations are endless (and sometimes deviant).
I can’t say I am surprised. Recent research we did on corporate reputation found that online reviews were nearly as important as word of mouth and recommendations from friends and family. I think that weeding out the fake outs is going to be a big business itself to maintain the credibility of reviewers.
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.”
Another stat to add to the many on how long it takes to recover reputation. Actually I should say…to add to the few. There really are not that many besides the one we did some research on that shows it takes about three to four years after a crisis. However, I found this one from the Ponemon Institute and Experian that says that nearly 850 executives say that it takes about one year to restore an organization’s reputation after a data breach. It also found, depending on the type of breach, that the average loss ranges from $184 million to over $330 million. Or put another way– the minimum brand damage is a 12% loss which could increase to 25% of the brand value if the breach was horrific.
Just as disturbing is the lack of data breach preparedness according to the research. A fairly large 43% had no plan in place to deal with a breach of confidential leak or theft of customer data. Perhaps this is why there seem to be so many. Most companies are unprepared and do not think of a data breach in the same way they do another type of crisis that is more common. Either way, it is critical to be prepared since if you really want to make your customers mad, a data breach is a surefire way to make that happen.
What is the cost of reputational harm? The New York Times has a back of the envelope calculation from recent crises making the news. Here is what they say?
“It would be too crude to conclude from this analysis that reputation is worth 11 to 14 percent of market capitalization…” and concludes the following: “What is clear, though, is that reputation has huge value. Companies need to guard theirs vigilantly.”
Somewhere in my many investigations on reputation, I have seen a similar calculation that reputation (not reputational harm) places a 10 to 14% premium on a company’s market value. So the Times might just be right.
[By the way, back from vacation. Back to work.]