managing reputational risk curbing threats, leveraging ...building a sustainable reputation 279 to...

MANAGING REPUTATIONALRISK

curbing threats, leveragingopportunities

JENNY RAYNER

The Institute of Internal AuditorsUK and IrelandWILEY

Innodata0470869488.jpg

MANAGING REPUTATIONAL RISK

Current and Forthcoming Titles in the IIA Series

MANAGING COMMODITY RISKJohn J. Stephens

MANAGING CURRENCY RISKJohn J. Stephens

MANAGING REPUTATIONAL RISKJenny Rayner

INTERNAL AUDITORS AS CONSULTANTSGeorges Selim and Sally Woodward

Series Editor: Andrew Chambers

MANAGING REPUTATIONALRISK

curbing threats, leveragingopportunities

JENNY RAYNER

The Institute of Internal AuditorsUK and IrelandWILEY

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Rayner, Jenny.Managing reputational risk : curbing threats, leveraging opportunities / Jenny Rayner.

p. cm.Includes bibliographical references (p. ) and index.ISBN 0-471-49951-X (cloth : alk. paper)1. Corporate image. 2. Business ethics. 3. Risk management. I. Title.HD59.2.R39 2003659.2—dc21 2003009971

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A catalogue record for this book is available from the British Library

ISBN 0-471-49951-X

Typeset in 10/12pt Times by TechBooks, New Delhi, IndiaPrinted and bound in Great Britain by Antony Rowe Ltd, Chippenham, WiltshireThis book is printed on acid-free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper production.

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contents

List of Figures ixList of Tables xiPreface xiiiAcknowledgements xv

CHAPTER 1: Reputation Unravelled 1What is Reputation? 1Why does Reputation Matter? 2Reputation and Brand 9Measuring and Valuing Reputation 11What Drives Reputation? 13Notes and References 16

CHAPTER 2: The Business Case for Reputation Risk Management 19What is Reputation Risk? 19Why Devote a Book to Reputation Risk Management? 20Why Bother to Manage Reputation Risks? 22In Summary 42Notes and References 43

CHAPTER 3: Risk Management: an Overview 47What’s it All About? 47Key Steps in Risk Management 49Board/Executive Commitment and Tone-Setting 49Vision, Values and Strategy 51Risk Appetite 52Supporting Policies and Procedures 53Consistent Risk Management Framework 54Organisational Culture 55Top Tips for Embedding Risk Management 56Notes and References 57

CHAPTER 4: Identifying, Prioritising and Responding to Risks 59Next Steps 59Comprehensive Risk Capture 59Documenting, Prioritising and Responding to Risks 70Notes and References 84

v

vi CONTENTS

CHAPTER 5: Making Reputation Risk Management Everyone’s Business 91Who Should be Involved? 91The Role of the Top Team 92Conscience-Prickers: the Role of Independent Directors 93Board Committees 95The Management Challenge 96Employees 96Risk Managers 97Internal Audit 97Public Relations 97Business Partners 98Winning Hearts and Minds 98Notes and References 100

CHAPTER 6: Managing Threats and Opportunities to Reputation 101Introduction 101Financial Performance and Long-Term Investment Value 108Corporate Governance and Leadership 113Regulatory Compliance 133Delivering Customer Promise 144Workplace Talent and Culture 162Corporate Social Responsibility 173Communications and Crisis Management 194Making a Start 210Notes and References 211

CHAPTER 7: Reputation in the Spotlight 223What Gets Measured Gets Managed 223In-House Information 224What They are Saying about You 225Learning from Others’ Experience 227Dialogue with Stakeholders 227Putting it all Together: the Reputation Risk Barometer 228Summing Up 230Notes and References 231

CHAPTER 8: Peace of Mind through Audit and Assurance 233What is Audit and Assurance? 233What Needs to be Done? 234Who Does What? 236The Crucial Role of Internal Audit 237The Role of External Independent Verification 243Beefing up Board Committees 244Optimising the Overall Assurance Effort 244The Benefits 245Notes and References 245

CHAPTER 9: Bolstering Reputation through Transparent Reporting 247The Communications Imperative 247The Benefits of Transparent Reporting 249

CONTENTS vii

Available Tools 251Simply the Best 256The Key to Unlocking Reputational Capital 259Notes and References 261

CHAPTER 10: Maintaining Momentum 263Continuous Improvement 263Reviewing, Refreshing – and Differentiating 264Leader or Laggard? 268Successful Embedding 269Notes and References 271

CHAPTER 11: Towards a Sustainable Reputation 273

An ‘Inside Out’ and ‘Outside In’ Task 275Investing in Reputation 278Building a Sustainable Reputation 279To Conclude 285Notes and References 286

CHAPTER 12: Future Challenges and Opportunities 289The Way Ahead 289Towards a Brighter Future 295Notes and References 295

Appendices 297Appendix A The Hermes Principles 297Appendix B Appendix to the Turnbull Report 299Appendix C BP’s Policy Commitment on Ethical Conduct 303Appendix D Twelve Steps for Implementing a Code of Business Ethics 307

Glossary 309Index 315

Reputation, Reputation . . . and Reputation 273

figures

Figure 1-1 Trust in integrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Figure 1-2 Shifting stakeholder expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Figure 1-3 The reputation equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Figure 1-4 Drivers of reputation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Figure 2-1 Reputation risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Figure 2-2 News headlines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Figure 2-3 The impact of investor engagement and SRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Figure 2-4 The effect of large companies’ profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Figure 2-5 Criteria for judging companies world wide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Figure 2-6 Convergence of agendas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Figure 3-1 Defining risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Figure 3-2 The risk management process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Figure 3-3 Risk appetite vs competence in controlling risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Figure 3-4 ‘Embedding’ risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Figure 4-1 Which risks should be considered? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Figure 4-2 Definition of risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Figure 4-3 SWOT analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Figure 4-4 Force field analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Figure 4-5 Stakeholders: a definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Figure 4-6 The power–interest matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Figure 4-7 The risk management process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Figure 4-8 Likelihood/impact matrix (three-by-three) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Figure 4-9 Example of a risk profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Figure 4-10 Risk assessment and response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Figure 4-11 Response to threats and opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Figure 4-12 Risk response options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Figure 5-1 The ‘freedom to act’ risk management hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . 92Figure 5-2 Reputation risk management: the unconscious competence . . . . . . . . . . . . . . . . 99Figure 6-1 Drivers of reputation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102Figure 6-2 The importance of corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Figure 6-3 Impact of CSR programmes on employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173Figure 6-4 British public attitudes, July 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175Figure 6-5 Potential CSR impacts by area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180Figure 6-6 CSR issues for the UK financial services sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

ix

x FIGURES

Figure 6-7 Key corporate citizenship issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182Figure 6-8 FTSE4Good model of best governance practice for CSR . . . . . . . . . . . . . . . . . . . . 187Figure 6-9 Communication of CSR activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188Figure 6-10 Triple bottom line reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Figure 6-11 Downsides . . . and upsides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190Figure 6-12 Rules of effective crisis management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206Figure 6-13 Threats and opportunities (adapted from FORGE II) . . . . . . . . . . . . . . . . . . . . . . . . 211Figure 8-1 Business reassurance: shifting the internal audit focus . . . . . . . . . . . . . . . . . . . . . 243Figure 9-1 Spreading the good news . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248Figure 9-2 The upsides of transparent disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251Figure 9-3 The virtuous circle of transparent disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260Figure 10-1 You need to scan the horizons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266Figure 11-1 The benefits of active reputation risk management . . . . . . . . . . . . . . . . . . . . . . . . . 274Figure 11-2 Engaging with stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277

tables

Table 1-1 Reputation Quotient attributes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Table 3-1 Organisational culture characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Table 4-1 Risk register template . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Table 4-2 Risk description and root cause(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Table 4-3 Risk description and existing controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Table 4-4 Likelihood/impact matrix (five-by-five) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Table 4-5 Impact guide chart (five-point scale) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Table 4-6 Sample guide chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Table 4-7 Risk responses, action plans and owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87Table 4-8 Risk assurance: activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90Table 6-1 Pillars of legitimacy and uniqueness attributes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Table 6-2 Reputation risk driver/stakeholder matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107Table 6-3 Stakeholder requirements and expectations on financials . . . . . . . . . . . . . . . . . . . 109Table 6-4 The Hermes Principles relating to financial issues . . . . . . . . . . . . . . . . . . . . . . . . . . 110Table 6-5 Stakeholder requirements and expectations on corporate governance . . . . . . . 115Table 6-6 Factors influencing the independence of non-executive directors . . . . . . . . . . . 121Table 6-7 Role of the non-executive director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123Table 6-8 Stakeholder requirements and expectations on regulatory compliance . . . . . . . 134Table 6-9 Stakeholder requirements and expectations on delivering customer promise . 145Table 6-10 Stakeholder requirements and expectations on workplace talent

and culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162Table 6-11 Stakeholder requirements and expectations on corporate social

responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177Table 6-12 Kingfisher’s four-rung ladder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191Table 6-13 CSR: doing nothing is not an option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192Table 6-14 Stakeholder requirements and expectations on communications and crisis

management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194Table 7-1 Reputation-related indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230Table 8-1 Examples of assurance activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235Table 9-1 Global Reporting Initiative reporting principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250Table 10-1 The risk management embedding continuum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

xi

preface

Warning signs that suggest a patient may not be suitable for cosmetic surgery include:expectations of an appearance enhanced beyond possibility; unrealistic expectations oflifestyle/career/relationship effects; an unwillingness to change the behaviour that led to theproblem.

(Plastic Surgery Information Service)

Many books have been written on reputation management, which position it as the primefocus of the public relations department and its spin-doctors. This book is different. It placesreputation and its associated risks – both threats and opportunities – squarely in the domainof the boardroom, at the heart of prudent business management, good corporate governance,leading-edge strategy development, effective risk management, corporate responsibility, com-prehensive assurance and transparent communications.

In this book I have tried to make sense of the seemingly specialist subjects of reputationmanagement and risk management in a way that is accessible to all. I have endeavoured tounravel reputation management for the board of directors, demystify risk management for thepublic relations professional, clarify corporate governance for the financial manager, explainthe essence of corporate social responsibility to the risk or audit manager and argue the case fortransparent communication, backed up by solid assurance, for all those involved in preparingand validating data for internal and external reporting. It is only when all these disparateinterested parties work together – contributing their individual insights and exercising theirinfluence – that a truly excellent reputation can be achieved and sustained.

Experience has shown that a sustainable reputation cannot purely be built ‘outside in’ byresponding to external expectations and moulding one’s image accordingly. Reputation must

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xiv PREFACE

primarily be built ‘inside out’ and should be based on a solid foundation of corporate visionand consistently upheld values, underpinned by robust management policies and ways ofworking, if it is to endure and enable a business to thrive. The analogy with cosmetic surgeryin the opening quotation is therefore most apt. Putting a positive PR gloss on an inherentlysick business will not result in a good reputation that endures in the longer term; investing in acarefully thought-through set of actions to nurture reputation, by curbing threats and leveragingopportunities to it, is much more likely to deliver.

In this book I have attempted to draw together the key lessons from a number of sectorsand disciplines and from the practical experience of leading organisations that have learned tobuild and capitalise on their reputations to underpin their success.

It is my intention that this book should be of value to a wide range of readers: from executiveand non-executive directors to risk managers and internal auditors, from company secretaries tocorporate affairs and investor relations professionals, from fund managers to communicationsconsultants. The lessons to be learned from the many examples of good – and bad – practicediscussed are relevant to all types and sizes of organisation whether they are in the private,public or not-for-profit sectors.

The book will take the reader on a journey from rising interest in reputation as a keyintangible asset, through increasingly rigorous corporate governance, risk management andinvestor requirements, to the growing clamour for socially responsible behaviour. It will offersome simple tools to help to identify and manage the risks to your business’s reputation. It willexplore the key drivers of reputation and the practical ways in which pace-setting organisationsare not only managing threats to safeguard their reputations, but are also actively exploitingopportunities to bolster their standing, as a key enabler in building a successful and sustainablefuture. That is not to say that the book has to be read from cover to cover. If you are anexperienced risk manager you may wish to skip Chapter 3, ‘Risk management: an overview’.Communications professionals may decide to skim Chapter 9, ‘Bolstering reputation throughtransparent reporting’.

However you choose to use this book, I trust that you will enjoy the journey and will discovernew ideas, insights, tools and techniques along the route that will enable you to play a morepositive and active role in protecting and enhancing the reputation of your own organisation.

Jenny RaynerJune 2003

acknowledgements

I would like to thank the countless individuals and organisations that have knowingly orunwittingly inspired me in the writing of the book. My gratitude goes in particular to thosebusinesses which have kindly allowed their insights and best practice models to be reproducedso that others might benefit from them. I am indebted to the UK’s Institute of Business Ethicsfor giving me the opportunity to conduct earlier research into the management of reputationrisk among their members – work that formed the foundations of my thinking in this book.

I am also most grateful to the Institute of Internal Auditors – UK and Ireland for sponsoringthis series on risk management topics, and to the series editor, Professor Andrew Chambers,for his original suggestion that I undertake this project. Thanks are also due to my friend andcolleague Walter Raven, whose encouragement and flow of cuttings have helped to keep mesane. And last, but not least, my heartfelt thanks go to my husband Keith and daughters Jo andDani for their understanding, forbearance and refreshments service as deadlines approached.

xv

one

reputation unravelled

WHAT IS REPUTATION?

The beliefs or opinions that are generally held about someone or something.(Compact Oxford English Dictionary)

The standard dictionary definition given above hints at the complexity of the reputation concept.Reputation is fundamentally about perception and beliefs; it is not necessarily an accuratereflection of reality. But in the eyes of the beholder perception is reality – perception is whatcounts. This is one of the features that differentiate the management of reputation, and itsassociated risks, from the management of other, more tangible assets.

Reputation is as relevant to individuals as it is to organisations. Although organisations arethe prime focus of this book, the personal reputation of individual directors and other prominentemployees can, and often does, influence corporate reputation as many of the examples citedwill show.

� Reputation is a collection of perceptions and beliefs, both past and present, which residein the consciousness of an organisation’s stakeholders – its customers, suppliers, businesspartners, employees, investors, analysts, communities, regulators, governments, pressuregroups, non-governmental organisations and the public at large.

These perceptions and beliefs are often built over a period of many years: every contact, everymedia mention, every rumour, every leak, every piece of gossip will play its part in formingan overall impression of an organisation’s standing.

1

2 REPUTATION UNRAVELLED

If image is the immediate external perception of an organisation, it could be argued that reputationis the historic and cultural dimension of that image – a stakeholder community’s ‘social memory’of the sum total of a company and its activities.

(Michael L Sherman, AIG1)

Reputation often can’t be quantified, compared against hard benchmarks or analysed in the sameway as financial or other numerical data. Its management requires softer skills such as soundjudgement, an ability to anticipate future trends and requirements, understand stakeholderconcerns, listen carefully, consider dispassionately and respond constructively.

Another key distinguishing feature of reputation is its potential transience. Although a ‘good’corporate reputation can take many long years to build, it can be destroyed in an instant throughan ill-considered ‘off the record’ remark, a lapse in personal behaviour, an ethical blunder inthe supply chain or an inadequate response to a crisis.

It takes twenty years to build a reputation and five minutes to destroy it.(Warren Buffett, CEO, Berkshire Hathaway)

In this era of instant, real-time communications there is no hiding place. Like fish in a goldfishbowl, today’s businesses are subject to constant, often unforgiving scrutiny.

Thirdly, reputation can be impacted by virtually anyone in the organisation or anyone in itssupply chain, such as outsourced service providers, raw material suppliers, distributors – oreven external auditors, as the Enron/Andersen débâcle has demonstrated. Everyone directlyinvolved with an organisation plays a part in moulding and upholding its reputation.

The perception-based, potentially transient and all-embracing nature of reputation posesparticular challenges for directors, managers, auditors and corporate affairs specialists. Howcan you:

� recognise and prioritise the issues that are most likely to impact corporate reputation?� assure yourselves that your major risks to reputation are identified and well managed?� ensure that everyone representing your organisation will act in a way that protects and

enhances corporate reputation?� track the changing requirements and expectations of key stakeholder groups?� demonstrate to your major stakeholders that you are living up to the claims your organisation

makes of itself – as well as meeting their expectations?

Possible solutions to these challenges will be suggested in the chapters that follow.

WHY DOES REPUTATION MATTER?

Why is so much emphasis now put on the management of reputation? The management ofreputation has, in the past ten years, shifted from being the preserve of public relations spe-cialists and corporate spin-doctors to become a mainstream boardroom issue. It is increasinglyrecognised that a good corporate reputation is a highly prized intangible asset – one which, ifnurtured and protected, can continue to grow in value over time. Reputation management is

WHY DOES REPUTATION MATTER? 3

therefore a topic that now merits board airtime and may warrant the specific deployment ofother resources. So what has brought this about?

The broader environment in which business operates has radically altered. Four key devel-opments have influenced this:

� the stakeholder imperative� globalisation� the technological and media revolution� the rise of intangible assets.

the stakeholder imperative

Since the advent of the industrial revolution and the birth of the limited liability public companysome 150 years ago, the primary goal of company directors has been to create wealth fortheir shareholders – initially large institutions or wealthy private investors. In this relativelyuncomplicated world, industrialists wielded unprecedented power and influence. The ends –increased production and rising profits – justified the means, which often resulted in unsafeworking conditions and poverty line wages. Such industrialists were rarely challenged; themedia were generally in awe of them and their achievements. They were trusted and reveredmembers of society. There was no environmental lobbying and little concern about the scantregard paid to worker welfare. This was, after all, progress.

There were, of course, a handful of prominent philanthropists whose religious and moral con-victions – combined with the recognition that a local supply of skilled, healthy and committedlabour was necessary to fulfil their business ambitions – inspired them to build houses, schools,roads and indeed whole communities to accommodate their burgeoning workforces. Leadingexponents of this blend of moral values and self-interest include Hershey in the USA, Cadburyand Rowntree in the UK and Krupps in Germany. Although both individual and corporate rep-utations were no doubt enhanced by such visible acts of corporate philanthropy, the primaryfocus was on wealth generation. A company’s continued ‘licence to operate’ was virtuallyautomatic if its financial and output targets were met.

How different is the business environment today. Now, before applying for planning per-mission for a building extension or launching a technologically innovative product, businessesgenerally feel the need to consult widely with their stakeholders2 – environmental lobby groups,employees, suppliers, local communities and governments – in an attempt to reach consensusor, at least, to agree a modus vivendi. Over the past 20 years there has been an exponentialrise in the demands, expectations and influence of these stakeholder groups, without whoseimplied ‘permission’ a business’s licence to operate can be jeopardised and its legitimacythreatened.

‘The global nature of our business also drives . . . the need to be involved in the societies of whichwe are a part. . . . Not out of altruism, but out of enlightened self-interest, because we believe thatif big companies are not seen to be making constructive social investments their licence to operatewill in the end be limited. And if your ability to operate is limited, then your performance is limited.

(Sir John Browne, chief executive, BP3)


Business leaders are often simply not trusted. In the wake of the Enron, WorldCom and Tycoscandals, Lawrence Weinbach, chairman and chief executive of Unisys, the US informationtechnology, commented at a meeting of the G100 club of top chief executives:

None of us feel good right now. If you are a CEO it’s almost like you have to prove that you’re notdoing something wrong, whereas before it was taken for granted that you were doing somethingright.4

Campaigning organisations now often enjoy more public trust than company leaders. Researchby the global public relations company Edelman in 2002 showed that over 50% of Europeanleaders trust campaigning organisations compared to 41% who trust companies5 – and thiswas before the WorldCom and Xerox scandals broke.

In the public sector, too, politicians are little trusted; their every word is scrutinised bypressure groups and a voracious media for signs of inconsistency, lack of integrity or a hint ofpolicy change. The proportion of British adults distrusting politicians stood at a massive 73%in February 2002, with only 19% trusting them (Figure 1-1). This fell further to 18% a yearlater, putting politicians on a par with journalists.

Base: 1972 adults across Britain, Feb. 2002.

Trust to tell truthQ Would you generally trust... to tell the truth, or not?

Do not trust

80%

85%

91%

14%

10%

6%Doctors

Teachers

Clergymen

59%

64%

31%

23%Scientists

Police

25% 62%Business leaders

13%

19%

79%

73%Politicians

Journalists

Source: MORI

Figure 1-1 Trust in integrity. (Reprinted by permission of MORI (Market & Opinion ResearchInternational))

In February 2002, in the wake of the US scandals, the proportion of respondents who trustbusiness leaders stood at only 25%, with those distrusting at 62%. A year later, this figure hadrisen by three percentage points to 28%, with a hefty 60% (compared with 62% in 2002) stilldistrusting business leaders.

The age-old respect for leaders in business or public life is long gone. It has been replacedby scepticism, aggressive challenging and demands for incontrovertible evidence – preferablyfrom an external independent third party (Figure 1-2).

This insatiable thirst for information and quest for ‘the truth’ has been fuelled by the tech-nological revolution, discussed later in this chapter.


Figure 1-2 Shifting stakeholder expectations.

The rise in stakeholder power is often seen as a threat, but in fact presents a huge opportunity,if harnessed properly, for businesses to gain a competitive edge and enhance their standing.Reputation can play a crucial role in determining how an organisation’s major stakeholdersare likely to behave towards it. The actions they decide to take will, in turn, play their part inshaping the organisation’s future reputation. A business’s reputation can influence:

� investors’ decisions to hold its shares� consumers’ willingness to buy from it� suppliers’ willingness to partner with it� competitors’ determination to enter its market� media coverage and pressure group activity� regulators’ attitude towards it� its cost of capital� potential recruits’ eagerness to join it and existing employees’ motivation to stay� stakeholders’ willingness to give it the benefit of the doubt when a problem or crisis occurs.

This final point can be a significant benefit. There are many examples of how accumulating‘reputational capital’ with stakeholders can help a business to weather the occasional storm.The occasional lapse of a reputationally strong company is likely to be regarded as a one-offaberration, because it has a solid track record and its values and business ethos are clearlyunderstood. The reaction will most probably be a shrug and a ‘that’s not like them’ rather thana ‘there they go again’.

A study in the late 1990s of the performance of US companies during the 1987 stock marketcrash found that the shares of the ten most admired companies dropped less and recovered faster,while the shares of the ten least admired companies plunged three times as far6 – a very strongindication that having a good reputation can pay real dividends. The total return of the top tenfirms in Fortune magazine’s 2003 America’s Most Admired Companies survey was −8.63%,more than 13% higher than the total return of the S&P 500.7 Good reputations, however,can only be built by understanding and responding to the requirements and expectations ofyour major stakeholders so that their confidence and trust in your business is fostered and


maintained. It is therefore perfectly logical that discussion of shifting stakeholder demandsand perceptions should find its way onto today’s boardroom agendas.

globalisation

The past 15 to 20 years have witnessed a dramatic shift in the respective roles of government,business and society. Governments have encouraged businesses to offer services previouslyprovided by the State through public–private partnerships. Large multinational corporationshave spread their tentacles into many parts of the developing as well as the developed world.The ubiquitous McDonald’s golden arches can now be seen from Manhattan to Manila, fromBoston to Bombay. Whether you believe that multinationals are a force for good by creatingjobs in communities where unemployment and hunger are rife, or a force for evil by erodinglocal culture and paying subsistence wages, the fact remains that globalisation is a majorinfluence in the world today.

The annual turnover of some major multinationals dwarfs the GDP of many nationaleconomies. Twenty-nine of the world’s 100 biggest economic entities are multinational com-panies, according to the United Nations Conference on Trade and Development (UNCTAD).According to UNCTAD,8 the activities of the 100 biggest companies, measured on the basis ofvalue-added – the yardstick used to calculate a country’s gross domestic product – accountedfor 4.3% of world GDP in 2000, up from 3.5% in 1990. The US energy group Exxon is largerthan all but 44 national economies.

Exxon, with estimated value-added of $63 billion, was about the same size as the economy ofPakistan and larger than Peru’s, while Ford, DaimlerChrysler, General Electric and Toyota were allcomparable in size to the economy of Nigeria. Philip Morris, the tobacco group, was on a par withTunisia, Slovakia and Guatemala, while BP, Wal-Mart, IBM and Volkswagen all ranked in sizebetween Libya and Cuba. GlaxoSmithKline and BT, the smallest of the top 100 multinationals,were equal in size to Syria.9

As a result, public and political expectations of business have steadily increased. In manycases corporations are now expected to plug the gap left by governments through provi-sion of the economic support, infrastructure and even the moral guidance needed to boostthe local economy. The potential power of transnational corporations to bring about changewas amply demonstrated at the August 2002 World Summit on Sustainable Development inJohannesburg. Speaking prior to the summit, president of the World Bank, James Wolfensohn,said: ‘Companies have more of a role than ever to play in reducing the poverty and socialexclusion that widens the gap between the haves and have nots.’10 The traditional boundariesbetween the roles of government, business and society have blurred and are now sometimestransposed.

As a consequence of these heightened and, at times, unreasonable expectations, companiesare under intense scrutiny from pressure groups and the media. Are they acting consistentlyacross the globe? Is there a local lapse in their ethical standards which indicates that theyare ruthlessly exploiting cheap local labour and are not enforcing their head office generated‘codes of conduct’? Are they abusing their corporate power?


The reality of globalisation is that the corporate reputation of multinational companies canbe jeopardised by the words or action of any employee or supply chain partner in any countryof operation in the world.

The reality of globalisation is also the globalisation of competition. Products and servicesjockey for position in a cost-sensitive worldwide market in which differentiation is ever moredifficult. Reputation may, in the final analysis, be the only factor that distinguishes your offeringfrom that of your competitors.

the technological and media revolution

Another crucial change has been the technological and media revolution – the advent of real-time communications and the rise of the Internet – which has resulted in businesses and publicorganisations responding to crises as they unfold under the harsh spotlight of the global mediagaze. If an environmental incident, code of conduct violation or even flippant remark attractsthe attention of the media it can be splattered across the headlines not just in Chittagong, wherethe transgression originally occurred, but almost instantaneously in Chicago, most probablycatching Head Office on the defensive. A report may appear in Internet on-line newsgroups, withcomment from a relevant ‘expert’, before the organisation itself has had a chance to respond.

The voracious media, ever quick to detect a chink in the corporate armour, will bay for bloodif they spot a story that has potential appeal and could fill column inches over a period of weeksor months; emotionally laden issues such as human rights abuses prove particularly popular.These days the media have scant respect for rank or authority. Whether the prominent figure orbusiness in question is a government body or a major multinational, anyone or anything is fairgame – provided it sells copy or airtime. A virulent or even personal attack can almost alwaysbe justified as being ‘in the public interest’ or ‘for the sake of transparency and openness’.

As a result, organisations have to be constantly vigilant and available for comment. As wellas trying to maintain cordial relations with the media in their major countries of operation,businesses are now exposed wherever they – or indeed their major suppliers – operate in theworld. Nor is it only newspapers and magazines that have to be scanned to keep pace withshifting stakeholder moods: chat rooms, on-line newsgroups, spoof defamatory websites alsoneed to be monitored regularly to ensure that emerging issues are understood and managedactively where possible. In addition to this, organisations’ own websites are frequently the firstport of call for journalists, pressure groups, investors and rating agencies seeking information.Woe betide an organisation whose website provides inadequate or opaque information onkey aspects of its activities or fails to acknowledge a breaking crisis. The media abhors aninformation vacuum and will seek comment from an unauthorised source in its relentless questfor news.

The unprecedented availability and accessibility of data via the Internet and global telecom-munications networks have had the knock-on effect of providing ammunition for stakeholdersto be more challenging and sceptical than ever before. This has, in turn, fuelled stakeholder de-mands for yet more information and more transparency. The ability of businesses to provide theright information, in the right form at the right time – the ability to communicate effectively –has itself become a key business competence and a driver of reputation.


the rise of intangible assets

The need to satisfy shareholders has historically been catered for by a narrow range of financialindicators, with the primary focus on earnings. However the wave of accounting scandals in theUSA in 2001–2 has shown that easily manipulable earnings are often not a reliable indicatorof a company’s true worth – and are certainly no guarantee of its future performance. Popularshareholder value benchmarks such as EBITDA (Earnings before interest, tax, depreciation andamortisation) have become discredited. Post the WorldCom scandal, EBITDA was playfullyreferred to as Earnings Before I Tricked the Dumb Auditor!

It is now apparent that blinkered focus on financial parameters can be a recipe for disaster:excessive interest in achieving short-term financial goals – and the director share options andbonuses linked to them – may not be in the best long-term interests of shareholders, let aloneemployees, suppliers and other stakeholders. A survey of 200 US companies conducted byPricewaterhouseCoopers tested the belief that the market had become too short-term oriented.Fifty-eight per cent of respondents strongly agreed that the financial community tended tofocus on short-term earnings; another 35% agreed, with only 6% disagreeing.11

There’s much more to running a successful, sustainable business than meeting short-termfinancial targets. Traditional annual reports alone provide insufficient information on the truehealth and future prospects of a business: their primary focus is on past financial performance.In today’s knowledge economy, a business’s intangible assets – such as corporate reputation,vision and leadership, the quality, skills and motivation of employees, the ability to leverageknowledge and innovate, intellectual property, products in the development pipeline, brandsand the quality of business relationships with key stakeholders – can account for 70% to wellover 90% of a business’s market worth.

Much of this is ‘off balance sheet’ and does not form part of the business’s quoted netassets, its ‘capital’. Current global accounting methods do not normally allow for inclusionof internally generated intangible assets, only those attained via acquisition.12 Even acquiredassets are usually lumped together in an overall ‘goodwill’ figure (the premium paid for abusiness in excess of its net assets).

For the most part, therefore, the true value of a business’s intangible assets can only beestimated by deducting its net book assets shown on the balance sheet from its total marketcapitalisation (share price multiplied by number of shares). The gap between the two figuresrepresents the business’s intangible assets.

The ‘market to book’ ratio (market capitalisation divided by net assets) can be as highas 10–15 for ‘high tech’ companies. More traditionally based companies are also affectedby the increasing reliance on intangibles. A US study in 1994 showed that tangible assetsaccounted for just a third of the stock market value of more than 2000 US manufacturingfirms. Just a decade earlier, these book assets had accounted for almost two-thirds of theirvalue.13

The knowledge-driven economy is not just about new high-tech industries built on a sciencebase like software and biotechnology. Nor is it confined to new technology. For it is about newsources of competitive advantage: the ability to innovate and create new products and exploit newmarkets. It applies to all industries, high-tech and low-tech, manufacturing and services, retailing

REPUTATION AND BRAND 9

and agriculture. The key to competitiveness increasingly turns on the way people combine, marshaland commercialise their knowledge.

(Charles Leadbetter14)

Professor Baruch Lev, from the Stern School of Business at New York University, estimatedthat in 1998 US industrial companies invested as much in intangible assets such as R&Dand training as they did in physical plant and equipment.15 However, although investmentin tangible assets is capitalised on the balance sheet, investment in intangibles is treated asan expense against revenue, even though a number of academic studies have shown a clearcorrelation between the level of investment in intangibles and future profits.

Intangible assets such as reputation are particularly valuable as they are difficult to imitateand can therefore act as powerful barriers to entry for potential new competitors, therebyhelping to maintain a business’s competitive edge.

Having so much of a business’s true value ‘off balance sheet’ does not augur well for correctvaluation by the market or, indeed, in the wake of Enron’s off-balance sheet shenanigans, forinvestor confidence. When the market lacks information it regards as important, it tends toerr on the side of caution and is likely to value a company at a level below its management’sexpectations. It is therefore not surprising that 30% of high-tech company managers believethat their companies’ shares are substantially undervalued, 45% believe that they are somewhatundervalued and only 18% regard their valuation as correct.16

Some governments, such as in the UK, are encouraging businesses to include much moreinformation in their annual reports on the non-financial aspects of their activities to enable in-vestors and other stakeholders to have better information on which to base their decisions.17 TheUS corporate scandals have strengthened governments’ resolve and have accelerated movesto introduce both voluntary and mandatory reporting requirements to underpin accountabilityand transparency. In the USA the Financial Accounting Standards Board (FASB) is workingon rules that will require US companies to disclose information regarding intangible assetssuch as customer lists, brands and technology. Professor Baruch Lev wants the FASB to askcompanies to disclose detailed information about everything from staff training and turnoverto investment in information technology. He would like to see disclosure of both inputs – theamount of money spent on training, for example – and outputs, such as staff turnover.18

Although the FASB is unlikely to go as far at Professor Lev would like, the tide has undoubt-edly turned: there is an irreversible interest in intangible assets as a key indicator of futureprospects – and reputation is a key component of this.

REPUTATION AND BRAND

Before progressing too far in the analysis of reputation drivers and their associated risks, itmay be helpful to define terms. Is corporate reputation the same as brand reputation? If not,what is the relationship between them?

For some organisations the concept of product or service brand does not enter the equation:corporate reputation is synonymous with the corporate brand. This is likely to be the case


for a local government organisation, pressure group or a business manufacturing a singleproduct.

However, a large and diverse conglomerate such as Procter & Gamble will have an overall‘corporate reputation’ to which its many individual brands contribute. Those diverse brands,such as Crest, Pampers, Olay, Pringles, Sunny Delight and Tampax, will each enjoy theirown brand reputation. A problem with one discrete product can often be contained and maynot affect the reputation of other unrelated brands, even though they share a corporate um-brella. A product brand-related crisis may therefore have only a minimal effect on shareprice, dependent on the importance of the affected product or service in the overall businessportfolio.

Conversely ‘corporate reputation’ issues, such as questionable boardroom ethics or directorintegrity, can rock the entire corporate edifice, and send the share price spiralling downwards –as the Tyco and WorldCom débâcles have demonstrated. It may also affect customer confidencein individual product brands, although this may not necessarily occur.

The extent of any reaction will depend in part on whether the organisation leverages its corpo-rate brand in promoting individual product and service brands or whether its individual brandspredominate. The name of Diageo, the global drinks company, may mean little to the averageconsumer as the group’s strategy is to strongly promote its individual product brands includingJohnnie Walker, Guinness, Smirnoff, J&B, Baileys, Captain Morgan, Cuervo and Tanquerayand to subordinate the corporate brand. Such a strategy can limit cross-contamination of otherbrands or corporate reputation when a single brand is tarnished.

At the other end of the spectrum, the corporate reputations of businesses such as BritishAirways, Delta and Singapore Airlines are almost indistinguishable from their brands. A hitto either overall corporate reputation or one of the service brands is therefore more likely tolose the confidence of both investors and consumers.

Even an apparently homogeneous business like the UK-based Virgin Group, which trades onits corporate image and the colourful personality and high profile of its founder and chairman,Sir Richard Branson, enjoys different reputations in relation to its many branded businesses.These are all brands spawned by capitalising on Virgin’s corporate image: Virgin the airlineoperator, Virgin the train operator, Virgin financial services, Virgin records. However, due tothe ubiquity of the Virgin name, these individual business brands are afforded little protectionwhen one of them is attacked. When Virgin Rail was under siege in 2000–2001 for its poorperformance and fare increases (demonstrated by headlines such as ‘Virgin Trains face freshattack over poor performance figures’19 and a cartoon depicting a frustrated would-be commuterwith the caption: ‘Virgin Trains: Train cancelled – Branson’s reputation on the line’20), themedia lost no time in highlighting problem areas elsewhere in the Virgin empire.

However, an academic debate on the whys and wherefors of corporate reputation versusbrand reputation is not additive in a publication that focuses on the management of risks toreputation. The basic techniques for assessing and acting on risks to reputation are the same,whether the reputation in question is of the ‘corporate’ or ‘brand’ variety. The term ‘reputation’or ‘corporate reputation’ will be used throughout this book and is relevant to all types andsizes of organisation. Readers will need to determine for themselves the extent to which itis helpful to separate out the risks to individual ‘brands’ when evaluating risks for their ownbusiness.

MEASURING AND VALUING REPUTATION 11

MEASURING AND VALUING REPUTATION

Owing to the importance of corporate reputation as a driver of business performance andstakeholder behaviours, a number of methodologies have been developed which attempt tomeasure and value corporate reputation. These are designed to help business leaders to focuson the right levers as they endeavour to manage their businesses’ reputations. Such models arehelpful in identifying and managing risks to reputation as they provide a good indication ofthe key sources of reputational threats and opportunities.

One of the best-known reputation surveys is Fortune magazine’s annual listing of the mostadmired companies in America, which began in 1983.21 A similar Fortune annual survey isconducted for the world’s most admired companies.22 For the global survey 10,000 direc-tors, executives and managers at 345 companies around the world are asked to rate eligible23

companies against nine attributes:

� Quality of management� Quality of products and services� Innovation� Long-term investment value� Financial soundness� Employee talent� Social responsibility� Use of corporate assets� Globalness.

Top-league players in the 50–strong All-Star global listing for 2003 included Wal-Mart atnumber one (up from second place), nudging General Electric into the number two spot afterheading the league table for four years, and Microsoft retaining third position.

A similar survey is conducted by the UK’s Management Today magazine (Britain’s MostAdmired Companies). The Management Today criteria are virtually identical to Fortune’s apartfrom a ‘Quality of marketing’ category in place of ‘Globalness’.24 Similar regional reputationsurveys are carried out in Asia by Asian Business and the Far Eastern Economic Review.

A global survey conducted by the UK newspaper the Financial Times (World’s MostRespected Companies for 200225), conducted annually since 1998, involves 1,000 CEOs in20 countries. It seeks to identify those companies and business leaders most respected by theirpeers and to establish the reasons for this. As well as being asked to nominate the three com-panies they respect most in the world and in their industry sector, and their top three businessleaders, participants were asked for the first time in 2001 to name companies that deliveredvalue in three separate areas:

� Value creation for customers� Value creation for shareholders� Best management of environmental resources.

For each of the three ‘value’ questions a relevant stakeholder group was also surveyed to providea contrast to CEO opinion (members of the general public for customers, fund managers world


wide for shareholders and media commentators and NGOs for environmental resources). Thisnew twist to the survey highlights recognition of the growing importance of public opinion,pressure groups and the media in shaping corporate reputation.

Reputation, rather like beauty, is something that largely exists in the eye of the beholder. Forcorporations that beholder is the myriad stakeholders whose perceptions combine across interestsand geographies to create a corporate reputation.

(Andrew Pharoah, managing director, Public and Corporate Affairs, Hill & Knowlton26)

The 2002 Financial Times survey also asked CEOs to nominate the companies they felt dis-played the greatest integrity and those that would make the most impact over the next five toten years on economic and social issues in emerging economies.

Table 1-1. Reputation Quotient attributes29 (Reproduced by permission of Harris Interactive)

Category Specific attributes

Emotional appeal � Have a good feeling about the company� Admire and respect the company� Trust the company a great deal

Products and services � Stands behind its products and services� Develops innovative products and services� Offers high-quality products and services� Offers products and services that are good value for money

Financial performance � Has a strong record of profitability� Looks like a low-risk investment� Looks like a company with strong prospects for future growth� Tends to outperform its competitors

Vision and leadership � Has excellent leadership� Has a clear vision for its future� Recognises and takes advantage of market opportunities

Workplace environment � Reward employees fairly� Looks like a good company to work for� Looks like a company that would have good employees

Social responsibility � Supports good causes� Is an environmentally responsible company� Behaves responsibly towards the people in the communities where it

operates

Another widely used methodology, the Harris–Fombrun Reputation QuotientSM (RQ), wasdeveloped by research company Harris Interactive in conjunction with Dr. Charles J. Fombrun27

of the Stern School of Business of New York University and Executive Director of the Repu-tation Institute. To ensure that perceptions of companies could be measured across companiesand many stakeholder groups, the RQ methodology, was based on the output from focus groupsin the USA where people were asked to name companies they did and didn’t like or respectand explain why.28 The series of pilot tests that followed determined the optimal 20 attributesthat were grouped into six categories that became the Reputation QuotientSM (Table 1-1).

managing reputational risk curbing threats, leveraging ...building a sustainable reputation 279 to...

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