Corporate reputations can be damaged for a number of reasons. To prepare and respond to reputation threats, businesses must pay greater attention to reputation risks.

Despite the increased weight placed on corporate responsibility in recent years, several companies have taken well-publicized hits to their reputations. The past year has been particularly hard on businesses.

A Harris Interactive survey concluded last year that more Americans view the overall reputation of corporate America as having declined a little (33 percent) or a lot (18 percent) over the previous year. Only 11 percent said it had improved. Fully 71 percent of Americans said the reputation of corporate America is poor, signaling a continued environment of consumer concern and frustration with the way companies operate.

“The breadth and depth of today’s reputational challenge is a consequence not just of the speed, severity and unexpectedness of recent economic events but also of underlying shifts in the reputation environment that have been under way for some time,” McKinsey Quarterly said last month.

Today, global faith in business is at a 10-year low, with 62 percent of people worldwide trusting companies less today than they did a year ago and 77 percent refusing to buy from companies they distrust, according to Edelman’s 10th Trust Barometer.

“[I]t’s going to be harder to rebuild our economies because no institution has captured the trust that business has lost — trust is not a zero-sum game,” Richard Edelman, president and CEO of global PR firm Edelman, said earlier this year. “Business must recast its role in society and move beyond simply generating ROI to its shareholders.”

Firms with strong positive reputations developed from well-articulated reputing strategies are better poised to improve in a number of ways: attract better talent; be perceived as providing more value, which often allows them to charge a premium; have customers who are more loyal and buy broader ranges of products and services; and, because the market believes that such companies will deliver sustained earnings and future growth, have higher market value and lower costs of capital. (Source: Reputation Institute’s 2009 Global Reputation Pulse)

On the other hand, enterprise-wide reputation damage can lead to lowered shareholder support, declines in financial performance and a loss of good will with local communities, not to mention a company’s “license to operate” in key markets.

Reputations can be damaged for a number of reasons, including consumer perception that a company is unethical. “Many reputation risks are the secondary result of other, more traditionally recognized risks,” The Conference Board states. “For example, if a manufacturer produces an unsafe product, it may lose customers and is likely to suffer financial costs due to a product recall, both of which affect reputation.”

This is why, according to The Conference Board, increasingly more global companies are investing substantial resources to manage their reputation risk and, over the last three years, have increased their efforts to do so.

“Senior executives are acutely aware of how serious today’s reputational challenge is,” according to McKinsey. “Most recognize the perception that some companies in certain sectors (particularly financial services) have violated their social contract with consumers, shareholders, regulators and taxpayers. They also know that this perception seems to have spilled over to business more broadly.”

Although greater attention is being paid to reputation risks, findings from AON Corporation’s recent 2009 Global Risk Management Survey indicate that less than two-thirds of respondents have formally reviewed the “damage to reputation” risk or have a plan in place, even though it was in the top 10 risks list. Similarly, The Conference Board determined that less than half of executives surveyed have reputation risk incorporated into a risk management function or another risk oversight program.

No matter a company’s current reputation, there are constructive steps it can take to move in the right direction.

Dr. Charles J. Fombrun, founder and chairman of the private research and advisory firm Reputation Institute, explains that repairing reputation damage is a three-part process: 1) identifying the factors and parties that contributed to the crisis; 2) developing initiatives that address those root causes; and 3) engaging with affected stakeholders to rebuild the reputation of the system as a whole.

Between The Conference Board and Reputation Institute, we’ve gleaned the following broad steps to managing reputation risk:

1. Identify reputational risks. Reputation Institute advises assessing the gap between stakeholder’s perceptions/beliefs and the company’s actual performance. Nearly 60 percent of The Conference Board’s respondents indicated that assessing the perceptions and concerns of stakeholders was an extremely or very significant issue, making it the highest-ranked challenge.
2. Prioritize reputation risks and stakeholder. Reputation Institute recommends assessing the probability of risks and the impact of the risk on reputation. Efforts are being made to quantify the value of reputation. A select group of companies is making progress in this area by working with specialist consulting firms to quantify the impact of reputation on share price, according to The Conference Board.
3. Identify effective means for mitigating risks and executing the risk strategy. Reputation Institute says to assess the best response strategy based on controllability of risk, the impact of risk on the business across stakeholders and the cost of implementing the strategy. According to The Conference Board, a company’s reputation should be considered during the preparation and execution of strategy and new projects, which hasn’t been the case in most companies.
4. Monitor changing beliefs and expectations. Reputation Institute advises closely monitoring changes in stakeholders’ beliefs and expectations that may affect reputation. Media monitoring has become more sophisticated, providing more tools to assess good, bad or neutral coverage and its prominence. Social media are gaining influence, but most companies are ignoring them. More consumers and investors are gathering information from blogs, online forums and social networking sites, but only 34 percent of Conference Board respondents said they extensively monitor such sites, and only 10 percent actively participated in them.

“Ultimately,” senior consultant Dr. Majorie Dijkstr writes at Reputation Institute, “risk management is about both anticipating strategic issues and leveraging opportunities to engage with the company’s key stakeholders around topics and initiatives that are most relevant to them.

“Effective risk management is about aligning perception and reality,” Dijkstr says.

Resources

Rebuilding Corporate Reputations
by Sheila Bonini, David Court and Alberto Marchi
McKinsey Quarterly, June 2009

Reputations of the 60 Most Visible Companies A Survey of the U.S. General Public
Harris Interactive, February-March 2008

2009 Trust Barometer
Edelman, Jan. 27, 2009

Trust in Business at 10-year Low in U.S but High and Rising in BRIC Economies
Edelman, Jan. 27, 2009

Managing Reputation Risk and Reward
by Daniel Sandy Bayer and Ellen S. Hexter
The Conference Board, March 2009

Reputation Risk Management is on the Rise in U.S. and European Corporations
The Conference Board, March 17, 2009

2009 Global Reputation Pulse
Reputation Institute, 2009

Reputation Institute Releases Results of its Global Reputation Pulse 2009 Study
Reputation Institute, May 6, 2009

2009 Global Risk Management Survey
AON Corporation, 2009

Repairing Our Damaged Reputation
by Charles J. Fombrun
Reputation Institute, 2009

Managing Reputation Risk: An Ounce of Prevention is Worth a Pound of Cure in Many Instances
by Majorie Dijkstra
Reputation Blog (Reputation Institute), July 13, 2009

Business Too Must Look to its Reputation
by Michael Skapinker
Financial Times, June 8, 2009

Crisis Management and Communications
by W. Timothy Coombs
Institute for Public Relations, Oct. 30, 2007

7 Must-have Elements in Every Crisis Communications Kit
by Don Crowther
Global PR Blog Week 1.0, July 15, 2004