Crisis Averted: The Crucial Role of Corporate Reputation Management
This written interview is also published in the April 2024 Marketing Edition of Inspired Business Media's Industry Thinkers Magazine.
To read, see pages 37-41: https://www.inspiredbusinessmedia.com/industry-thinkers-magazine-april-2024/
What is Corporate Reputation?
A corporation’s reputation is the net value of the favourable and unfavourable perceptions across stakeholder groups in the market that a business operates in. For larger companies, a corporate reputation represents the difference between a company’s market capital and it’s liquidation value. In asset valuation, a good corporate reputation can be a very valuable intangible asset for a company, with sound investments in reputation management increasing market capital for a firm (1).
How does effective corporate reputation management contribute to long-term business sustainability and success in today's competitive marketplace?
The impact of a company’s corporate reputation on it’s success is often overlooked or downplayed due to its intangible nature. Yet, objectively a company’s reputational capital (the value of its reputational asset) can equal around 20% of the firms market capital (1). In addition, companies with better reputations attract, retain and develop top talent, get more favourable media attention and can command higher price premiums, increasing margins. The most advantageous benefit of a good corporate reputation is also intangible – Trust.
In today’s market place radical transparency has never been more important, where what you do will influence your corporate reputation far more than what you say. In essence, a good solid corporate reputational management plan will include internal culture, change management and communications plans as well as an effective and authentic external communications strategy.
A company more than ever must be firmly grounded why it exists, what it stands for and what differentiates it in the market and live up to those promises every day:
“Good corporate reputations are critical because of their potential for value creation, but also because their intangible character makes replication by competing firms considerably more difficult.”
— Corporate reputation and sustained superior financial performance by P.W. Roberts & G.R. Dowling – Strategic Management Journal (2002) (2)
The importance of reputation management has also been cited by business leaders with over 1,000 CEO’s surveyed in 2014 stating brand and reputation management were among their top 5 strategic priorities. In spite of this, many companies still fall short of implementing an effective reputation management strategy.
What are the potential risks and consequences for organisations that neglect or fail to prioritise their reputation management strategies?
The greatest risk to the firm occurs in the misalignment of its external communications strategy with the internal culture, performance and behaviour of the firm. In many cases, the extent of a company’s corporate reputation management plan includes hiring a PR company for ‘comms’ around crisis management. However, crisis management is not the same as reputational management, where reputational management is the process by which a company’s vulnerabilities are prevented from becoming crises (1).
It can take years to build and maintain a strong corporate reputation and only one incident to destroy it. Still, many companies underestimate the costs and consequences of reputational damage. For example, the Volkswagen emissions scandal reportedly cost the company over €30 billion (2). This failure was not a crisis management failure, but a failure in reputation management.
This is an exceptional case, but it’s a case that shows authenticity is important, as a basic minimum a company must be able to do what it says will for corporate reputation strategies to add value to the firm. Failing to do so, is a significant reputational risk.
These misalignments between a company’s communications (as well as expectations among stakeholder groups in the market) and its performance and behaviour are what lead to crisis management situations occurring in the first place, yet it’s still challenging to convince some business leaders that prevention is better than cure here.
Why? It’s the pain (and cost) of change and the belief that ‘it won’t happen to us’. Most people, business leaders including, will only change when the pain of staying the same becomes greater than the pain of change. That’s why for many companies their approach to corporate reputation management is to hire a PR agency to handle any potential crisis from impacting their reputation. It’s easier. It’s easier than building a comprehensive and preventative corporate reputation management plan that takes into account company culture, performance and behaviour as well as how the company would like to be seen in the market.
Yet, the true cost of this inaction, as clique as it sounds, is that by failing to prepare you’re preparing to fail and in the event of a crisis, the cost as well as a significant monetary cost, is to share price, with reputational damage being one of the worst things that can happen to a company’s share price(1). Events of significant reputational damage can also represent a disruptive and lengthy interruption to business operations.
In what ways does a positive corporate reputation influence consumer trust, brand loyalty, and ultimately, financial performance?
A company’s reputation will impact consumer behaviour through influencing their ‘consideration set’. A consideration set is the top 3 companies that come to mind whenever a potential customer has a need that arises in a particular category – for example – their car gets totalled and they need to buy a new one. Therefore the first 3 companies that come to mind – especially the first one to come to mind - are significantly more likely to win that business.
If a company is known, liked and trusted and has a good reputation in the areas that are important to the potential customer, they are more likely to be included in the initial consideration set, more likely to win the business and therefore, the consumers consideration set has the power to influence the financial performance of the company.
For consumer goods, awareness and reputation are very important, but what about in B2B markets? Well, these markets are becoming increasingly relationship driven, so the better the relationship, founded on trust, impacted by reputation that the company has with the potential client, again the more likely they are to win the business.
A reputation is only as good as its authenticity, so for loyalty and ongoing marketplace perceptions of reputation, the experience that a customer or client has with the company has the power to shape the future reputation of that company. Therefore, it’s critical that a company lives up to what it says it does for a positive and valuable reputation to continue in future.
Measuring success is everything-how measurable is the success of an effective corporate reputation strategy?
While many companies have risk and crisis management plans in place, few effectively manage the full reputational asset of the firm well. Whether this is through resistance to change, the cost of what’s required – in time or money – to manage the asset well, or just the belief that there is no way to measure or manage reputation, it’s not an excuse for a poorly managed asset that can decline in value over time if not proactively managed well. In reality, corporate reputation is more manageable and measurable than you might think.
Corporate reputation is regarded as an intangible asset, traditionally this made it harder to manage and measure. Yet, there are many ways now available to measure the value of a company’s corporate reputation. Not least, growth in market capital not attributable to other sources.
Many companies now use measurement tools like the NPS (net promoter score) to measure the value of their reputation, this provides a limited view of reputation and only really considers it from the viewpoint of the stakeholder groups being surveyed (most often customers). It doesn’t take into consideration the views and value of reputation across wider and in some cases more influential stakeholder groups.
A more wholistic and reliable measure of corporate reputation is the Harris-Fombrun Corporate Reputation Quotient (CRQ), which measures corporate reputation in 20 different measures across 6 different categories (3). More prominent and global companies will be featured in the annual Harris poll, yet those not featured can still track and measure their performance across the 20 measures in 6 categories internally by rating each measure on a scale of 1 to 7 and from that assessing their strengths and weaknesses to build a reputation management program around.
What role can business leaders play in supporting business reputation by building their own personal brand?
A company’s true culture is expressed by its people(1), and when the authenticity and congruency between a company’s performance, behaviours and communication is more important than ever for it’s reputation, the power of the people to represent the organisation is also more important than ever.
This is reflected in the expectations of the market with many consumers ‘expecting’ CEO’s and senior leaders to have a personal brand online, with 82% of consumers more likely to trust a company when the CEO is on social media. The role of the personal brand can also impact the commercials of the business with 77% of consumers more likely to buy when the CEO uses social media (4).
Keeping a low profile is no longer a risk mitigation strategy, because far worse than saying the imperfect thing, is saying nothing. People buy from people they know, like and trust and even though a corporate reputation is based on a business, it’s the people who own, lead and work in those businesses that build culture, enhance performance and influence behaviour and therefore are the primary drivers of a company’s corporate reputation, for better or for worse.
References:
1. Reputation Management: the key to successful public relations and corporate communications by John Doorley and Fred Garcia
2. https://www.reuters.com/article/idUSKBN2141JA/
