How important is reputation to a company? Just ask BP (BP) or Toyota (TM). Worrying about it is enough to keep corporations and their boards up at night. In fact, in a new survey from Eisner LLP, accountants and advisers, 54% of directors said reputational risk was an important topic of boardroom discussions. In fact, it came in second only to regulatory compliance risk, which 63% identified.
Indeed, at a gross financial level, some see the entire intangible portion of a company's stock price (which averages 70%) as being built on reputation, says Mary Adams, founder of Trek Consulting.
"It's incalculable," says Steve Kreit, partner in the Services to Public Companies practice at Eisner, who adds, "A lost reputation can sink a company."
A company's brand is an asset, and although it may not show up on a balance sheet, it can have an impact on earnings, share price and the long-term sustainability of a company if not managed properly, says Lewis Goldberg, managing partner in the public relations and financial communications practice at KCSA Strategic Communications. Brand image is also key to retaining and acquiring new clients and employees.
Poor Processes Can Lead to Damaged Reputations
Though BP's stock is showing signs of life, having apparently ceased its major slide and bounced a bit from its recent 14-year low of $29, at this stage, it's too early to predict how the energy giant will emerge from the muck. But it's not hard to imagine that it might fail to recover.
Arthur Andersen's reputation was so tattered after it botched the handling of the Enron audits that, although the company didn't fold, it was forced to sell off its accounting practice and change the name of the remainder of the firm in an attempt to avoid being associated with its disgrace, points out Mark Gilmore, president and co-founder of Wired Integrations, a professional systems integration and consulting firm.
The key threats to a company's reputation are anything that calls the quality of operations and management into question. "Have a discipline in place to do things right the first time," recommends Trek's Adams. "This includes having the right people with the right training to use the processes consistently over time. The financial bottom line indicates how a company did last year. To understand how the company will do next year, you need to understand its reputation, which is essentially its 'license' to do business in the coming year."
The biggest risks usually can be traced to poor processes, and eliminated by better ones. For example, consider how a company treats confidential information, such as personally identifiable information it retains and maintains in paper and electronic formats. AT&T (T) recently saw thousands of Apple (AAPL) iPad customer email addresses compromised, which led to the FBI being called in and an ongoing investigation. AT&T responded quickly, which makes a difference, points out John Fodera, a partner in Eisner's Internal Audit and Risk Management Practice.
It's Not the Mistake, But How You Respond to It
Reacting appropriately in a time of crisis can mitigate damage to reputation: Sometimes what goes wrong isn't nearly as bad as the company's poor response. For example, BP now says it will create a $20 billion fund to cover its sins. But that response came after it failed to take responsibility for the Gulf oil spill early, attempting to pass the buck and failing to disclose the full extent of the disaster.
By contrast, when Johnson & Johnson (JNJ) found itself confronting the issue of people dying from taking tampered Tylenol, not only did it immediately recall all the pills that were in the market but it also went to work to create new, safer packaging.
"By acting fast, taking the responsibility and doing something to prevent a [recurrence], they set themselves on the path toward an even stronger reputation," says Priscilla Nelson, co-author of Riding the Tiger: Leading Through Learning in Turbulent Times.
In a different way, Toyota was able to weather its problems better than some might have expected because it had years of trust built up based on direct consumer experience of its quality standards. "They had to draw down their account in recent months, but their reputation account is not yet bankrupt," says Adams.
But for all the fuss about reputational risk, the truth is, there's no reason to bring out a coffin for BP yet.
"Companies can bounce back if they're transparent, show regret and concern for those that [they] hurt or may have hurt. A company can best protect against a crisis by giving the highest priority to implementation of a culture and systems designed to protect against operational, financial and safety/health/environmental risks. The preventive systems work well if properly resourced and supported by boards and management," says Bill Ide, a partner at the law firm of McKenna Long & Aldridge.
In the short term, a reputation-scarring crisis may be painful, but the intensity fades. Even Goldman Sachs (GS), which has seen its name hammered by scandals, accusations and lawsuits, has big-time customers like GE (GE) and Berkshire (BRK.B) sticking with it.
Adds Adams: "You could say that Goldman made a lot of people a lot of money, and they haven't lost all the balances in their trust/reputation accounts. Goldman's crisis and continuing investigations limit its options right now, but they still have something left in the reputation bank."
Improve your investing savvy with the right financial toolset.View Course »