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The Evolving Role of the Board in Reputation Management

By Brad Wilks, MD, Midwest, North America, MSLGROUP

The global financial crisis and an on-going drumbeat of corporate, government and other institutional scandals have served to weaken the already flagging reputations of many leading institutions and companies around the world. And, while the global economy appears to be slowly mending, prospects seem slim for any sort of near-term reputation recovery for many of our most important institutions and leading companies. 

What can be done to rebuild stakeholder trust when public skepticism of business stands at its highest levels in years?  Unfortunately, for many companies, the answer seems to be to redouble communications efforts about their CSR, sustainability and charitable initiatives as a means of recovering their reputation.  And, while certainly such initiatives should be universally applauded, reputation is more complex than this – it is an amalgam of many perceptions across a wide spectrum of stakeholders.

Communications alone will never be successful in reversing a poor reputation that’s the result of underlying poor behavior or unsavory business practices, unless it is accompanied by behavior change.

Launching a New Paradigm

So perhaps it’s time to push for more fundamental change in how reputation is managed within our enterprises. Maybe we should be challenging our organizations to reevaluate their core values and behaviors and make changes in organizational governance, which may over time have greater credibility in rebuilding trust and reputation. 
launching a new paradigm

One model for addressing this issue would be to establish a separate Reputation Committee of the Board, which woud have responsibility for reporting back at each board meeting the current status of the organization’s reputation, along with an assessment of emerging reputational risks which must be addressed.  By elevating reputation oversight to the Board of Directors, leaders will begin to grasp the existential importance of reputation, and shift their perspective from that of purely risk mitigation to seeing reputation as a strategic business imperative which can drive competitive advantage.

Having the topic of reputation elevated to the boardroom might also encourage other important governance decisions to be taken within the context of their potential impact on reputation – for example, controversial sourcing decisions or executive compensation packages.

The Problem of Who Owns Reputation

For although conventional wisdom says that reputation is a critical asset that needs to be invested in, nurtured and protected, the truth is that for most companies, reputation is too often an asset that everyone owns, which usually means that nobody owns it.

Reputation is also difficult to measure, although more and more attempts are being made to measure and ascribe a value to corporate reputation.  One such example is the Reputation Institute’s RepTrak® model, which quantifies and analyzes reputation across stakeholders, allowing for predictive analytics and integrated management dashboards.

Most of us tend to think of the Chief Communications Officer as the primary steward of corporate reputation, but it’s often unclear who, if anyone truly owns corporate reputation, has the ability to influence it, or is held accountable when it is impaired.  It’s difficult to be an effective steward of corporate reputation when oftentimes actions that negatively impact reputation emanate from higher within the organization.

higher level within the organization

For example, in 2010, when Johnson and Johnson was involved in at least 11 major product recalls, CEO William Weldon maintained the company’s quality control issues were not “a systemic problem,” an assertion that damaged the company’s credibility with stakeholders, including regulators.

In 2012, when it began to emerge that a trader in JPMorgan Chase’s London office had taken a huge bet on credit derivatives, CEO Jamie Dimon initially pooh poohed the incident, saying the Whale had been “harpooned,” and predicting that no one would be talking a year later about what turned out to be a $6.2 billion loss, one of the largest in Wall Street history.

When first confronted over the traffic scandal involving the shutdown of the George Washington Bridge, New Jersey Governor Chris Christie went from joking, “I worked the cones, actually. Unbeknownst to everybody, I was actually the guy out there. I was in overalls and hat,” to public contrition and “I am embarrassed and humiliated,” within just a matter of weeks, while seeing his prospects fade as the GOP Presidential front-runner in 2016.

In each of these instances, those responsible for communications served under the individual or group whose actions or comments resulted in reputational damage.  So it seems clear that reputation needs to be championed at a higher level within the organization.

The Role of Directors

One of the biggest barriers to gaining Board acceptance of reputation as part of their oversight responsibility is that most directors see their primary responsibilities as fiduciary oversight – to drive value creation for shareholders.

Reputation is too often seen as an intangible asset that’s great to strive for, but impossible to measure or value.

sustainable growth

In this model, the board’s primary focus is setting the strategy, and then ensuring that management is executing that strategy to drive value while protecting and growing tangible assets such as cash, property, plant and equipment, accounts receivables, IP and other things that can be easily monetized for claimholders in a bankruptcy.

Reputation, and its twin sister, human capital, while priceless assets, are viewed as impossible to value or transfer, which means they often get relegated to lower levels of priority.

One of the great ironies of reputation, both personal and institutional, is that we take it for granted when things are going well.  Like the air we breathe – our reputation is absolutely essential to our health and wellbeing, yet only in its absence when we’re left breathless and gasping do we truly come to appreciate it.

A key lesson of recent years is that corporate reputation is fragile and ethereal – something that can evaporate in minutes like dew with the rising sun.

Reputation is also not entirely within our control – subject to behaviors by groups and individuals outside the corporate walls and beyond our day-to-day sphere of influence — part-time employees, freelance consultants, outsourced departments, our global supply chain and network of business partners, or even trusted colleagues and employees with mal intent.

What’s also true is that recovering from a reputation collapse is much more difficult and time consuming than it is to build and maintain that reputation in the first place.

So the challenge in reputation management is how do we build and preserve it so as to mitigate damage when things go poorly.

How do we build and preserve reputation?

So how do we develop a paradigm to both nurture and value reputation in this new world, where the world’s most successful companies can spring to life as multi-billion dollar enterprises – think Facebook, Twitter, Snapchat and WhatsApp– and yet have few of the traditional measures of value such as revenues, employees, or manufacturing plants.

Clearly a disproportionate piece of the value ascribed to these emerging behemoths must be ascribed to human capital, IP, a unique (and often untested) business model and reputation.  How can companies or their boards possibly place a value on, protect and preserve these most vital of assets, whose worth can evaporate in an instant?

build and preserve

As more and more of the global economy is built upon this knowledge –based foundation, reputation management is increasingly top of mind within the C-Suite and in boardrooms around the globe.  Surveys show that reputation risk is viewed by the majority of executives and investors as the most significant threat posed to a company’s global business operations.  A favorable reputation can translate into higher sales, profits, the ability to recruit the best and brightest, and a premium share price multiple.  Studies confirm there is a favorable correlation between reputation and share price – in the M&A world, premiums are paid for companies with strong reputational capital.

Google’s recent $3.2 billion acquisition of Nest, a three-year old unprofitable company with just 200 employees, is a case in point.

By creating a Board-level committee tasked with reputation management, companies can demonstrate how important this issue is to those entrusted with its oversight.

However, to be successful, such a committee would need to receive regular information about the company’s performance as measured not only by profits, but also in terms of how it is perceived by key stakeholders.

The committee would have the ability to solicit input from key stakeholders including employees, customers, shareholders, as well as have access to updates about conventional and social media coverage of the company.

In instances where the news is bad, performance goals should be established that the board holds management and the rest of the organization accountable for achieving.

Such performance goals would result in actions to address not only the communications surrounding the reputational risk, but the underlying root causes of the problem in terms of operations, human resources, sales and marketing or supply chain management.

over time

In this way, the entire board of directors can remain updated as to the current status of the company’s reputation based on a regular survey of key stakeholders to identify strengths and material weaknesses in the company’s reputation.  Some companies are already moving closer to this model by establishing corporate social responsibility or reputation committees appointed by the Board which are charged with the oversight of their social obligations and reputation as responsible corporate citizens.  Other leading companies are expanding the discussion of reputation within the context of their current board committee structure.  However, making the commitment to reputation as an issue that warrants its own Board Committee remains an elusive goal.

If we’ve learned anything from the past few years it is that only by regularly assessing the state of a company’s reputation, auditing its reputational assets and potential liabilities, and defining a course of action to stave off actions which might damage reputation, can Boards of Directors truly demonstrate a model of good corporate governance which will help their organizations begin to regain trust.

This post is part of the People’s Insights magazine “The Future of Reputation

Brad Wilks

 

Brad most recently served as Managing Director and head of Sard Verbinnen & Co’s Chicago office. There he served as a counselor to senior executives, managing important corporate issues such as restructurings and bankruptcies, proxy contests, litigation and crisis communications, product recalls and senior executive changes.

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