Reputation Risk

In this world of 24-hour news cycles and instant access to information, reputation matters more than ever.

The B2B world has known this explicitly for years. Arthur Andersen wasn’t killed by operational failings; it was killed by a reputation that went from highly respected to highly toxic almost overnight. Proving in very public terms how hard it is to stay in business if no one wants to do business with you.

Over the past few years, threats to reputation have happened faster, and hit harder, than ever. There is no bank, professional services firm or energy company today who isn’t thinking hard about their reputations even as we speak.

Yet managing reputation isn’t actually very easy to do, and one of the most prevalent brand decisions of the past decade actually served to make the job harder rather than easier.

This decision was the overarching brand strategy of consolidation; a time where mergers and acquisitions created a new era of mega-companies trading under singular mega-brands.

There were three very logical reasons for this extreme level of brand consolidation:

  1. That by consolidating the brand under a single identity and a single set of values, that this would bring the disparate cultures of acquired businesses together to form a new, singular culture.
  2. That by creating a single brand under which to trade, you’d be maximizing brand building investments in order to drive superior brand value.
  3. That a single brand is more efficient, more cost effective and easier to manage than multiple smaller brands.

All of these factors do in fact have merit, but the thing they fail to take into account is reputation risk and the potential for negative reputation contagion.

Making this more specific, what this approach doesn’t take into account is the level of potential risk that exists across the disparate activities of the corporation and the potential impact a localized failure may have on the whole.

Take BP for example. It’s highly unlikely that any of the small business operators who’d franchised the BP name for their gas stations took reputation risk into account. For them, BP was a big and reputable brand name, something to take advantage of.

Unfortunately, in the oil industry, reputation risk appears to flow downstream. I’m sure that none of these gas-station owners thought their forecourts would become instant ready-made protest sites primed for 24/7 news-media coverage. (One also wonders how different things may have been had the only available BP location been an anonymous headquarters, hidden among the skyscrapers of a large city)

Equally in the banking space, it appears that reputation risk flows quite freely from the most risky to the most risk averse parts of the business. In this case, the risk-taking investment banking arms of large banks have created significant negative reputation risks for the more risk-averse, and publicity shy, private wealth management arms.

In fact, adding the reputation risk lens on top of the decision-making factors above, and I don’t think so many banks would have consolidated investment banking operations and private wealth management activities. In fact, I wouldn’t be surprised to see banks with large private wealth management businesses looking to undo these brand consolidations in order to create risk-managing separations over the next 2-3 years.

Beyond brand strategy, however, reputation risk also needs a new mindset going forwards.

In the past, reputation has largely been silo’d within the business. On the operational side, risk is a technical discipline where risk/reward decisions are calculated. On the HR side, risk is a behavioral equation to be mitigated by policies and adherence to values. On the communications side (both marketing and corporate communications) reputation risk is something to be mitigated by getting out ahead and projecting an image of success, competence and of admiration.

The challenge is not that these are wrong interpretations, but instead that they have to work much more in sync with each other.

Instead of thinking of reputation in separate ways, I think we need to consider reputation in terms of layers:

  1. The operational layer.
    This sits at the core, because very simply some business areas are inherently more risky than others. Understanding where the operational risk lies is central to considering how to manage reputation, whether or not to use multiple brands to do so, and what to do in the event of a crisis.
  2. The cultural layer.
    In this layer, the key is to set expectations for what is and is not expected, and accept that this may in fact differ depending on the amount of operational risk being taken.
  3. The communications layer.
    In this layer, the key is to focus on the areas of genuine value to be projected, and to create scenario responses to the worst potential impacts on reputation. These need to be developed with representatives of both the operational and cultural layer. While you can do much to mitigate reputation risk and build a strong reputation, it will be the job of the communication layer to deal with the fallout of something catastrophic happening. Successfully navigating this is likely to be much easier if you’ve already practiced your responses using disaster scenarios. In some senses, this will be almost like military exercises for corporations.

In our instant response, 24/7 world, reputation risk is not going away. In fact, it will only become more and more difficult to manage.

Against this, the ability to take reputation risk into account when making big brand decisions, and then push it down to scenarios of the “unthinkable” are going to become increasingly important.

And hopefully, if fundamental brand strategy decisions were made with risk in mind, and strong response mechanisms trained, then reputation risk can become much, much less of a risk to the business.

Image borrowed from here