Managing Public Reputation

Daniel Diermeier September 8, 2007

The Stakes

Reputation has moved to the top of the agenda for many CEOs and senior executives. What used to be a “nice to have” is now increasingly considered a core asset that needs to be protected and managed. Reputational damage can hurt a company in many ways. Take the example of Walmart. Over the last two years, Walmart has been the subject of negative news coverage on topics ranging from environmental and labor concerns to allegations that Walmart has a negative net economic effect on local communities.¹ These accusations (whether true or false) have already had an impact on Walmart’s business performance. According to a leaked internal study, about 2-8% of shoppers have taken their business elsewhere because they were no longer comfortable shopping at Walmart stores. Perhaps more importantly, Walmart has encountered increased resistance to opening new stores, especially on the West Coast and the North Eastern region of the United States.² As a consequence, Walmart’s stock price has been depressed over the last two years. To address the concerns Walmart has engaged in an extensive reputation

¹ Spotts, G. and Greenwald, R. (2005). Walmart: The High Cost of Low Prices. Disinformation Company. ² Seeking Expansion in Urban Areas, Wal-Mart Stores Get Cold Shoulder (September 25, 2006). The Wall Street Journal.

management initiative,³ and the Wall Street Journal has called Walmart’s CEO Lee Scott

the de facto “Chief Reputation Officer.”

New (user generated) media have only accelerated this trend. When rats were found in a Taco Bell restaurant, the corresponding YouTube video made sure that any customer anywhere in the world could take a look for himself.⁴ Similarly, the ability to repeatedly watch and listen to the racially offensive marks by controversial talk show host Don Imus even days after their initial broadcast led to a ground-swell of outrage that eventually let to Imus’ being fired.⁵

Yet, while awareness of these issues is undoubtedly increasing in C-suites and boardrooms, companies are not much closer to effectively navigating these treacherous waters. Reputation management is still largely the domain of the communications department, and while CEOs increasingly recognize the importance of effectively communicating to the public, in many cases communication departments still lack sufficient funding and credibility within a company. In part, this lack of influence may reflect senior management’s suspicion of the business value of effective communication. However, it

³Ibid.

Baron, David P. 2006. “Wal-Mart: Nonmarket Pressure and Reputation Risk (A).” Stanford, Graduate School of Business Case. Baron, David P. 2006. “Wal-Mart: Nonmarket Pressure and Reputation Risk (B): A New Nonmarket Strategy.” Stanford, Graduate School of Business Case. ⁴ Take a Rat to Dinner (March 16, 2007). New York Times.

http://www.nytimes.com/2007/03/16/opinion/16shaw.html?ex=1331697600&en=fafe448c82627ccd&ei=5 090&partner=rssuserland&emc=rss (accessed 9/11/07) Youtube.com Video: http://www.youtube.com/watch?v=su0U37w2tws ⁵ “Imus Suspended Over Race Slurs” (April 10, 2007) The Wall Street Journal. http://online.wsj.com/article/SB117612028739263955.html (accessed 9/11/07)

also reflects the inability of communication experts to integrate their craft effectively into

what really matters to a business: value creation and cost reduction.

Consider the example of Starbucks. Starbucks’ success is based on creating an enjoyable experience for customers. This experience is not only based on coffee of consistently high quality, but a welcoming atmosphere and ambiance, friendly, knowledgeable staff, the ability to have one’s coffee prepared exactly as one likes it, and so forth. For many customers an important aspect of this experience is a belief that Starbucks is a decent company that treats its employees well (e.g. health-care benefits even for part-time employees) and cares about the environment (e.g. policies on shade-grown coffee). Now suppose (counter-factually) that a Starbucks customer, while waiting in line for her latte, picks a copy of the New York Times and reads a front page article that accuses Starbucks’ purchasing department of using its purchasing power to put the squeeze on poor coffee farmers in Guatemala. Reading this story may thoroughly destroy the pleasurable experience for this and similar customers. Suddenly, the customer may experience a strange aftertaste after sipping from her coffee, vaguely reminiscent of “guilt.”

The financial consequences of reputational crises can be substantial. Consider the crisis recently experienced by Bausch & Lomb, a producer of soft contact lenses and lens care products. On April 10, 2006, the U. S. Center for Disease Control and Prevention linked a surge in potentially blinding fungal infections with Bausch & Lomb's ReNu with MoistureLoc contact lens solution. As a result, Bausch & Lomb's stock price dropped by

about 20% within a few days, a loss that was sustained for roughly a year and amounted

to the destruction of roughly $630 Million in share-holder value. Bausch & Lomb subsequently experienced accounting restatements and was subsequently acquired by private equity firm Warburg Pincus.⁶ Other examples include issues of after-market trading and market timing in the mutual funds industry. Putnam Investments, at the time a division of Marsh & McLennan, not only paid $110 Million in penalties and restitution with Federal regulators, but lost roughly $100 Billion in assets under management as a consequence of the scandal.⁷ Current examples include concerns over safety of products manufactured in China. This lead to numerous recalls, including three recalls by Mattel in the span of four weeks in the Summer of 2007.⁸

These effects are particularly important as companies adjust their value propositions from a product-focused to a customer-focused perspective. As companies strive to provide an “experience” or provide “solutions” for customer problems, more of the value to customers becomes psychological; the value increasingly resides in the mind of the customer. Of course, achieving a close customer connection can be of tremendous value for companies’ product commoditization, provides additional value to customers etc., but it also bears additional risks. In many cases developing a closer relationship with customers requires mutual trust. But the dark side of trust is betrayal, and the fall-out from customers who feel betrayed can be massive.

⁶Warburg Pincus to buy Bausch & Lomb (May 16, 2007). Reuters. http://www.reuters.com/article/businessNews/idUSWNAS167220070516 (accessed 9/11/2007) ⁷ Putnam to pay $110M in penalties. (4/28/2004). USA Today. http://www.usatoday.com/money/perfi/funds/2004-04-08-putnam_x.htm (accessed 9/11/07) ⁸ Mattel recalls third batch of Chinese-made toys with lead paint. (September 4, 2007). Fox News.com http://www.foxnews.com/story/0,2933,295739,00.html (accessed 9/11/07)

An important lesson not only from the fictitious Starbucks scenario, but also from Walmart, Bausch & Lomb, and Putnam is that a company’s reputation among customers is only partially shaped by direct experiences with the company. There are whole population segments with very firm opinions about Walmart that have never set a foot into Walmart stores. Similarly, both existing and potential customers of e.g. Taco Bell may choose to never set foot into a Taco Bell restaurant once they were exposed to the rat video. In other words, perfect execution at the typical customer “touch points” is not sufficient for building and maintaining an excellent reputation. Rather, third parties, especially the media, play an important role in shaping customer perceptions. This is illustrated in the following figures.

Shaping Customer Perceptions

It is important to note that the reputational impact can extend beyond the (legal)

boundaries of a firm.

Impact Beyond Boundaries

In the case of the recent concerns over manufacturing quality in China, the reputational impact of Mattel and other toy companies (including retailers) stems from the practices of their suppliers, not the company itself. In other words, a company’s reputation can be damaged not only by its own actions but by actions of business partners in its value chain. The charge against the company is not that it itself engaged in the offensive practice, but it failed in its oversight over its suppliers. These effects will be most pronounced for companies that either have a strong brand or are engaged in an industry where trust is crucial (food, children’s products, financial services, health care, etc.). By outsourcing key parts of their value chain, companies may lower costs and mitigate both operational and (to some extent) legal risks, but the same is not true about reputational risks,

especially for well-known consumer brands: if you live by the brand, you die by the

brand.

While our focus so far had been on customers, the business impact of reputational damage does not stop there but may lead to regulatory and legal consequences all the way to significant freedom-to-operate concerns. Walmart’s inability to open stores in time, as well as the lawsuits and regulatory action in the Bausch & Lomb and Putnam cases are just a few examples. It is important to recognize that prosecutors and regulators themselves are subject to public opinion. Consider a typical accounting scandal. First, management is under attack by shareholders, regulators, perhaps even prosecutors. Then, attention will turn to the auditors. In many cases potential inquiries can be settled behind closed doors, but in cases where an issue receives substantial media interest, such approaches are likely to fail. The problem is that, in those cases, public officials have to manage their own reputation and demonstrate that they were not “asleep at the wheel” or, an even more serious charge, “in the pocket of the industry.” And a true and tested approach to dispel these public concerns is to come down hard on the affected company or industry.

Reputation of Regulators

This effect is particularly prominent in the case of regulators that are subject to oversight by other members of the executive (e.g. a minister) or legislators (e.g. an oversight committee). That is, if regulators do not proactively act tough they may be subject to hostile hearings or reprimands. This further increases the incentive to take a hard line against the company. In many cases, public officials may shift their stance on an issue in response to mounting pressure. In an evolving scandal such shifts may be sudden and unexpected. Companies are sometimes stunned by the fact that the same regulators that were highly cooperative only a few weeks ago now refuse to meet or return phone calls. Public opinion is dynamic, and skillful public officials will adjust either directly or indirectly through the oversight process.

The examples discussed above hopefully convinced even the skeptical reader that reputational concerns have moved to the core of managerial responsibilities. Long the

domain of PR and legal experts, they are now increasingly a core concern of areas such

as marketing and risk management. But the question remains how to best manage those challenges. This is where new concepts and frameworks are needed.

Concepts, Framework, and Processes

There are three core difficulties in managing corporate reputations:

Lack of control
Limited credibility
Overwhelming complexity

Control. As demonstrated in the examples above, companies cannot directly control third party messages. Consider the example of a credit card company. If a customer is unhappy with a late-charge, a customer services representative can directly engage with the customer on a one-on-one basis and rectify the situation, e.g. by waiving the fee or at least convincingly explaining its rationale. In contrast, if the New York Times runs an article detailing the alleged abuse of late fees among credit card companies, the company cannot reach all the readers of this article, certainly not among potential customers. Direct to consumer advertising in many cases is not a successful remedy for this dilemma as companies frequently lack credibility with customers or the public as a whole.

Credibility. When third parties (e.g. journalists or scientific experts) play a role in

shaping a company’s reputation, companies need to realize that in many cases their own credibility is much lower than that of the experts. In the competition over a company’s reputation, companies are at a disadvantage compared to scientists, doctors, even nongovernmental organizations and governmental actors. Importantly, which third parties have high credibility varies from country to country. In Northern Europe, nongovernmental organizations have some of the highest credibility scores. This is not true in Japan or the United States where some government agencies (e.g. the FDA) have more credibility with customers. Companies need to understand that what works in one market may not work in another. During the introduction of genetically modified food, Monsanto successfully used the FDA to overcome customer concerns about the safety of its products in the U.S. market.⁹ A similar strategy in the European market, however, dramatically back-fired, in part because the corresponding Health Ministry’s reputation had previously been damaged after it mismanaged the occurrence of Mad Cow Disease in the UK.

Complexity. Customers usually do not understand the complexity underlying certain business decisions. As a consequence they will form their own beliefs on whether the company’s behavior was appropriate or not. In many cases they will rely on heuristics and rules of thumb when forming an opinion about a company. Social and cognitive psychologists have demonstrated that risk perception is subject to various biases and so

⁹ Charles, Daniel (2002). Lords of the Harvest. Perseus Books Group.

called “framing effects.”¹⁰ For example, customers will overestimate the risk to themselves if they empathize with the reported victim of allegedly improper business practices, especially if the victim comes from a particularly vulnerable group such as children or the elderly. Food safety concerns are a prime example of such processes, especially when they involve items consumed by children, such as milk or cereal.

These few examples point out that reputation management not only can be extremely challenging, but can affect the core assets of a company, especially if maintaining high levels of trust among customers, regulators, investors, or other stakeholders is necessary for sustained business success. It follows that reputation management should not be relegated to functional specialists such as the legal or PR department. In many cases reputational challenges have their origin in ordinary business decisions such as market entry (Monsanto and genetically modified food), marketing (charges of predatory marketing practices by credit cards), or product design (pre-payment penalties for sub-prime loans). Once reputational challenges have reached the desk of the corporate counsel or the head of PR, they frequently have reached crisis proportions. It is therefore much better to integrate reputational considerations into the day-to-day business decisions of the managers that run the business.

To successfully manage reputational challenges companies need to develop three core capabilities:

¹⁰ Slovic, P. (1972). Information processing, situation specificity, and the generality of risk-taking behavior. Journal of Personality and Social Psychology, 22, 128-134. See also Kahneman, D., Slovic, P. and Tversky, A., eds. (1982). Judgment under Uncertainty. Heuristics and Biases. Cambridge, UK: Cambridge University Press.

a functioning early warning system.
Ongoing measurement of the reputation of the company, its markets and products
Rapid situational assessment by issue, product, and market.

We discuss each functionality in turn:

Early Warning Systems

In many cases reputational challenges have their origin in areas not frequently monitored by companies. For example, a data privacy issue may first be voiced in an obscure computer science conference and not raised again until it has reached main-stream media. In many cases, companies can completely avoid or at least mitigate reputational crises by changing business practices, stakeholder outreach or through detailed communication plans. But developing such responses takes time, the one thing companies do not have once an issue has reached crisis proportions. In retrospect, the warning signs could have been identified but they never reached the key decision-makers. Moreover, in many cases, issues that turned out to be enterprise-critical were not even identified as potential risks; they never made it onto the radar screen. As “unknown unknowns” they never could be integrated into a proper risk management framework.

This is the value proposition for investing in early warning systems. This may range from informal monitoring of various media sources over proactive stakeholder outreach to the

development of an internal issue anticipation group. Indeed, in many cases the critical

information already resides with an organization (e.g. in call center or sales representatives) but is not aggregated.

Of particular promise is the use of information technology in this area. Companies are increasingly benefiting from using sophisticated tools from computational linguistics and artificial intelligence to identify and monitor emerging issues. Conceptually, the idea is closely related to the concept of “open source intelligence” in the area of national security. The idea is that in the context of emerging issues, the short-coming does not rest in the lack of information but in too much information. Unfortunately, much of the available information is never aggregated to actionable intelligence. The “dots” were present, but not connected.

The Bausch & Lomb example discussed above presents an illuminating example. The

U.S. Center for Disease Control and Prevention announced its findings on April 10, 2006. Yet, the link between the infections and ReNu had been uncovered almost two months earlier, on February 22nd, in a public announcement by Singapore's Ministry of Health. (Bausch & Lomb subsequently withdrew the ReNu solution from its markets in Singapore and Hong Kong). The government announcement had been reported in the region's major newspapers, but had not been covered in the U.S. Notice also Bausch & Lomb's stock lost a mere 3% from $71.51 at the close on February 21st to $69.40 at the close on February 23^rd with very low trading volume.

Example: Bausch & Lomb

Effectively early warning systems have essentially three components:

Issues Identification
Issues Evaluation
Issue Monitoring

The purpose of issue identification is to list all issues that may affect a company’s reputation or other non-market risks. This is where tools from computational linguistics and text analytics can be most fruitfully applied. The general problem is that information about reputational risk is usually not available in a structured or numerical format (in contrast to, say, financial information). Rather, it is buried in documents, news articles,

websites, blogs etc. This makes information extraction and evaluation a challenging task.

Fortunately, recent technical breakthroughs in the automatic processing of unstructured data permit organizations to identify emerging issues more easily.

Next, companies need to determine which issues are enterprise-critical. This requires defining and assessing risk-profiles that are specific to an issue, a product, or a company. The following graph outlines a methodology for creating such risk profiles.

Risk Segmentation

Food Poisoning at Food Poisoning at American Express Nestle

Data Privacy at Data Privacy at Nestle American Express

Media Centrality

Business Centrality

Here risk segments are characterized by two dimensions. The dimension of Business Centrality measures how closely an issue is connected to a company’s core value proposition. In the examples given above consider the issues of data privacy are of a much higher concern to a financial services company than to a food company; the reverse

will be true of food quality. In both cases (food quality for Nestle, data privacy for American Express) the issues directly touch upon a core competency that the respective

company needs to consistently demonstrate in order to maintain the trust of its customers.

Media Centrality refers to a different risk dimension. Here the point is that certain issues are likely to create more and more hostile media attention. In some cases this will depend on the nature of the issue. On average, issues related to food safety are considered better stories than issues of IT security. In part this follows from the fact that a mass audience will more easily connect with issues that are easy to understand and are of direct relevance to their daily lives. Of course, there are exceptions to this observation. As an example, consider the enormous attention focused on Y2-K or, more recently, issues of identify theft related to internet commerce. The point is that increased media centrality will make it more likely that customers and stakeholders (including regulators) will pay attention to an issue. This will usually lead to a more serious management challenge.

Identifying business centrality of an issue is usually not a difficult task for companies once they recognize the importance. Anything that affects a company’s value proposition, its core competencies, competitive advantage, or core values should trigger an alert. Media Centrality, on the other hand, is much more difficult to anticipate. In other words, it is easy to see that an issue has reached a high level of media centrality if it is featured on 60 Minutes or the front page of USA Today. A much more difficult task is to predict which issues are more likely to create strong media interest and why.

A useful tool for this purpose is Baron’s theory of the media (Baron 2006).¹¹ According

to Baron’s approach, news coverage is largely driven by two forces: audience interest and societal significance.¹²Audience interest drives the amount and likelihood of coverage, while the societal significance dimension determines how an issue is covered, e.g. whether an issue is merely reported or whether its segmentation of media coverage.

Perception Drivers

In-depth Mass-Market Coverage Coverage

News Hour, 60 Minutes, Local

Economist

Societal Significance

news

Extensive

osi

Brief Coverage Coverage

FT, WSJ, trade “Infotainment”,

press

Cable news

Audience Demand

Depending on an issue’s location in the interest-significance space, news coverage will change significantly. The most dangerous location for management is the high-audiencedemand / high-societal-significance quadrant (“north-east”). This is the area where in the

U.S. 60 Minutes or 48 Hours are located - hard hitting TV news programs that address controversial social issues, but need to present them in a format that is attractive to a

¹¹ Baron, David P. 2006. Business and its Environment. 5^th Edition. Prentice Hall: New York ¹² For more details see Baron (2006).

mass audience. This format focuses on drama, individual cases (“victims”), easy to understand moral conflicts (“good” versus “evil”) and testimony instead of data. In this media environment complicated arguments (e.g. the technical and regulatory limits for effective data protection) are very difficult. An approach that focuses solely on technical or legal aspects will almost always fail. Rather, the company must tell a compelling, credible story that can stand up to images with direct emotional impact.

This can be clarified with the help the following figure.

Theory of the Media: Reputational Terrain

Analysis Stories

Societal Significance

osi

Facts (Live) Coverage

Audience Demand

As each issue segment is associated with a certain type of coverage, companies need to adopt strategies that are appropriate to the “reputational terrain” where an issue is located. For example, in the low-audience-demand / low-societal-significance quadrant (“southwest”) much of the coverage is purely based on facts. Wire services or the back pages of

the business press are good examples. In this segment clarifying facts or pointing out

inaccuracies constitute appropriate strategies. For example, an erroneous story about a planned bond offering can simply be clarified by a press release etc. In the low-audiencedemand / high-societal-significance quadrant (“north-west”) we are dealing with sophisticated, in-depth coverage that is intended to convey the complexity of an issue and perhaps explore its various dimensions. The trade press or certain high quality publications (e.g. The Economist) fall into this category. This segment is all about analysis and interpretation, and companies can shape the discussion by providing data, reports etc. In contrast the high-audience-demand / high-societal-significance quadrant (“north-east”) is all about telling a story. The focus will be on individual cases and how they are affected by an issue. A good story is built on dramatic tension around a few key characters: a victim, a villain, and a hero. Even though companies may perceive themselves as the victims of hostile media coverage, this perception is not share by the general public. Companies are typically not the object of empathy: we do not feel sorry for powerful organizations, especially when they are perceived as wealthy and/or profit motivated. Of course, the public may emphasize with individual workers loosing their jobs, but the emotional reaction does not carry over to the company as a whole. The same is true of shareholders. Loosing an investment does not elicit the same amount of sympathy as being the victim of fraud. This implies that, for companies, only two roles are available: hero or villain. The key difference between these two roles is their relationship to the victim. Heroes act on behalf of and in the interest of the victim. Villains do not. A company that responds to an injured child by referring to its exemplary safety statistics is perceived as uncaring, even monstrous. Appropriate strategies express

direct and personal empathy for the victim and then commit themselves to “getting to the

bottom of the problem.”

On one hand, these communication strategies can be very effective once an issue has caught on, even if it has reached crisis proportions. On the other hand, companies have considerably more room to maneuver and prepare for potential crises if critical issues are identified early in their life cycle and assed for media centrality. Media centrality then corresponds to the likelihood that an issue will end up in the high-audience-demand / high-societal-significance quadrant. Anything that increases the likelihood of an issue leading to a “good story” is relevant. Examples include the presence of an identifiable, sympathetic victim or victim group (e.g. poor minorities as the subject of predatory marketing practices by unscrupulous lenders), the availability of visuals (consider both Abu Ghraib and rats at Taco Bell), involvement of a celebrity (e.g. Al Rocker and weight-loss surgery), a well-known brand (e.g. recall of Thomas the Tank Engine), or a connection to a particularly controversial issue (e.g. abortion and the “morning after pill”).

It is critically important to think about these dimensions from the perspective of the general public rather than from experts. Let us reconsider accounting scandals in this context. First, even major accounting scandals (e.g. WorldCom) usually do not involve sympathetic, identifiable victims. The injured parties are shareholders that do not elicit a lot of sympathy form the general public. Second, accounting matters are usually complicated and require extensive prior knowledge. That means that the overwhelming number of accounting crisis will be characterized by low audience interest. With respect

to regulators or prosecutors, this means that in most cases a settlement can be reached

behind closed doors. There are some cases, however, where we move towards the northeastern corner high-audience-demand / high-societal-significance. The prime example, of course, is Enron. First, we had identifiable victims (Enron’s employees that not only lost their job but their pension), a set of perceived villains (Enron’s senior management) and many other factors that increases audience interest (the friendship between Enron Chairman Kenneth Lay and President Bush, the California energy crisis, the company’s arrogant attitude and the lavish life-style of its executive, the tearful TV interview with Mrs. Lay). All this added up to a great story with victims, villains, and heroes (the whistle-blowers and journalists).

In this context, the general public then learned about document shredding at Arthur Andersen, Enron’s auditor. Andersen was immediately perceived as the accomplice and enabler of Enron’s deeds. Here, public beliefs does not constitute a judgment about Enron’s or Andersen’s legal culpability, rather it is a statement about the court of public opinion. And here the judgment is clear: guilty. This now leaves prosecutors and regulators no other option than to come down hard on Arthur Andersen and Enron, leading to the demise of both companies.

What does the Arthur Andersen tragedy teach us about early warning systems? First, the risk to professional service firms is largely driven by client characteristics. It was not the accounting issue per se that destroyed Arthur Andersen, but the verdict by the public and

its representatives. But the public and the media paid so much attention to the issue because of its high level of media centrality. To see this compare the Enron case to the

WorldCom case, the latter being a bigger bankruptcy with clear evidence of fraud by senior management but lacking the sensationalist elements that made Enron such an irresistible story.

Second, accounting firms should be monitoring the risk potential of their clients. For example, a moderately sized hedge fund usually does not present a high risk profile, unless the hedge fund counts Hollywood actor Sylvester Stallone as its investors, as in the case of Lipper Holdings. Then it becomes front page news.

Third, client issues cannot be monitored by hand. The number of potential clients and issues is just too big. However, the text analytical methods discussed above can form the basis for such a system. The approach is to apply automated issue identification algorithms to a client portfolio, score the identified issues according to their risk profile, and then monitor their dynamics, while being prepared to take quick and decisive action if necessary. Note that the same approach can be applied to the monitoring of supply chains. Again the number of suppliers is usually too big to be monitored by people, especially for retailers. Automated (or semi-automated), open source intelligence systems provide a promising remedy.

Measurement. What gets measured gets managed. While financial and operational risk can now be (largely) quantified, this is not the case for reputational risk. If companies engage in any measurement at all it is largely based on surveys or focus groups which

make it difficult to obtain enough reliable data for a proper quantitative analysis. What

are lacking are both operational measures (similar to, e.g., customer satisfaction scores in marketing or quality measures in manufacturing) and financial measures that connect reputational with financial performance. Again, the sophisticated use of information technology provides a potential remedy. As discussed above, media coverage heavily influences the perception of customers and other stakeholders. While measuring their beliefs directly may be prohibitively costly and impractical, we can measure the opinions expressed in the media and third-party sources. This can be accomplished by using computer algorithms that are trained to identify positive or negative opinions, using technologies not too dissimilar from a sophisticated spam filter. The effect of this approach is to generate quantitative data about a company’s reputation that can then be further analyzed. For example, companies can compare the reputations of a given product in two different markets, measure reputational challenges over time, and assess whether a particular communication strategy has “moved the needle”. Once such measures have been developed, they can be connected to a company’s financial performance using standard event study methodologies. This allows an integration of reputational risk with other risk types.

Situational Assessment. Once critical issues have been identified and their impact measured, managing such issues requires rapid and reliable situational assessment. For example, in many cases issues are “owned” by only a few journalists. Also, journalists frequently rely on the same group of experts that are then repeatedly quoted. Companies

need to understand who is an “ally” or an “opponent.” Of course, the list of opinion leaders, gate-keepers, etc. is both issue and market-specific and therefore requires

ongoing monitoring.

Of particular importance is a good understanding of interest groups and opinion leaders that may move an issue to the forefront. In some cases motivated activists may shrewdly utilize the media to advance their agenda. One of the most famous examples of this strategy is the confrontation between Royal Dutch/Shell and the environmental activist group Greenpeace over the issue of deep-water disposal of the Brent Spar oil buoy in 1995. After an acrimonious battle between activists and the company - where sales in Germany and other European countries dropped by as much as 50% - Shell UK who had operating responsibility for the Brent Spar decided to abandon deep-water disposal and seek a license for on-shore disposal.¹³ Only one year later, Royal Dutch/Shell was targeted again, this time over human rights issues related to Shell Nigeria. Royal Dutch/Shell subsequently engaged in an extensive reorganization and value-based change process to avoid similar issues in the future.

The key to Greenpeace success was to create an irresistibly story for the media. To generate sufficient attention to their issue, activists need to obtain media coverage in the north-eastern corner. This is difficult. Competition for air and print space is fierce and many environmental issues, such as the Brent Spar disposal, involve complicated, technical issues. Before Greenpeace took action, the Brent Spar issue was located in the south-western corner with little to no coverage in the media. Thus Greenpeace needed to

¹³ See Diermeier, D.. 1995. Shell and Greenpeace. Harvard Business School Case P19, September 1, 1996. Reprinted in David Baron. Management and its Environment 2nd-6th Edition. Prentice Hall 2006. for more details.

stage its protests in a way that increased both audience interest and social significance.

The Brent Spar occupation was an ideal means to increase audience interest. It provided drama, high stakes and great visuals. Moreover, by taking a confrontational approach, e.g. turning on the water canons, Shell directly played into the hands of the activists by providing dramatic images of a high-stakes confrontation.

But increasing audience interest was not enough for Greenpeace. The activists also needed to provide the German public with a simple, straightforward reason to act. Ingeniously, Greenpeace framed the whole issue as a recycling issue, something German citizens care passionately about. The activists’ slogan ‘Here I am dutifully recycling my garbage, and there comes big business and simply dumps its trash in the ocean,’ made the choice for German citizens an easy one. Since every upstanding German citizen recycles, Shell, by dumping the Brent Spar into the deep ocean, cannot be a good corporate citizen. It is important to recognize that by framing the issue as one concerning the moral duties of corporate citizens, the scientific, technical arguments brought to the discussion by Shell were powerless. They looked like feeble attempts by the company to avoid its onerous duty as good corporate citizen.

Companies need to understand that they are increasingly being scrutinized for their social impact. In other words, as companies are becoming the main engine of social and cultural change on a global scale, they are being held accountable for the consequences of such change. Food companies are being asked to promote healthy eating habits. Retailers and manufactures are pressured to adopt sustainable business practices and require the same

policies for their suppliers. Financial service companies are being targeted for

“predatory” lending practices. Overall these trends have substantially increased the risk for reputational damage at a global scale. Understanding these changing issue landscapes and stakeholder environments proactively is more and more becoming a critical capability for globally operating companies.

Conclusion – The Need for Reputation Management Systems

Given that the importance of managing reputational risk is no longer much in doubt, companies need to develop appropriate processes and capabilities. The following figure summarizes the key components of an effective reputational risk management system.