Who would have imagined? At a time when the Dow Jones Industrial Average climbs above 15,000 for the first time and investor euphoria persists, trust in companies and their CEOs ranks near or at record lows. In this case, "rank" can serve as an adjective, too. Investors even have turned against the CEO who once could do no wrong, JP Morgan Chase's Jamie Dimon, urging him to surrender one of his roles as chairman and CEO because of some celebrated gaffes.
These corporate governance issues and crises have sparked a steep rise in reputational risk as trust in business continues a decade-long erosion. And good business practices alone won't remedy it. Challenges to a company's reputation arise from a specific business decision or practice. To manage that reputation successfully requires the active leadership of the CEO with the board of directors serving as avid monitors.
They must ensure that the reputation risk-management process becomes integrated deeply within the business. This requires an enterprise-wide capability. What triggered the unusual paradox we're in? Four principle factors have contributed to the sharp increase in reputational risk:
- Media coverage, whether traditional or social, which has increased dramatically worldwide, sparking increased scrutiny that companies simply can't avoid. Transparency is expected because once an issue is alive on the Internet, it's permanent and facts become "negotiable."
- Globalization of activist organizations now matches the global reach of companies. Consequently, NGOs succeed in forcing private regulation. That's the "voluntary" adoption of rules and standards that constrain certain forms of company conduct without involving public agents. The mechanism driving much of the change proves to be creation of reputational crises for global entities. Often, they force companies to change their business practices. Global supply chains in particular are vulnerable, illustrated by the recent controversy over building safety among Bangladesh suppliers.
- Expectations of corporate conduct have shifted, especially among younger demographic groups. This helps explain the explosive growth of corporate social responsibility, sustainability and socially responsible investing. These aren't passing fads. Yet, increasingly, moral outrage drives reputational crises, whether over environmental concerns or executive perks.
- Business models based on trust have emerged and are on the rise. Companies are recognizing that to develop unique customer experiences and solutions, they must draw closer to their customers' unspoken--perhaps, even unconscious--desires and needs. This requires trust. While this shift generates fresh opportunities to create value, even the mere perception of broken trust produces strong feelings of betrayal. This proves a particular challenge for the banking industry, as today's headlines illuminate.
Further, companies involved tend to respond poorly. Why? For the most part, they still view stewardship of their reputations as a narrow issue best left to reactive PR. As in, "put-the-fire-out" PR. Consequently, the response usually is inadequate, often prompting nervous questions from directors. In addition, these underdeveloped capabilities as reputational risks intensify can trigger more reputational crises.
While they are taking more notice, corporate boards are unsure about what to do. For some reason, most companies and their leadership still believe that forging a strong reputation is relatively easy and merely requires using common sense. To them, it is simply a natural consequence of doing right by customers, employees and business partners.
To be sure, successful reputation risk management is difficult. Typically, it requires a high level of strategic sophistication and mental agility. This can run counter to day-to-day business decisions and corporate structures built for effectiveness and efficiency. A company's reputation is shaped not just by its direct business partners, customers and suppliers, but also by external constituencies. Frequently, constituencies dormant for quite awhile spring into action when a reputational crisis erupts. Companies need to have a process to identify such risks.
A company's reputation rests on what other publics are saying about the company besides its business partners and customers. Thus, company officials must be able to assume external publics' perspectives and viewpoints, especially when they're critical or hostile. A proper response by business leaders requires a strategic rather than defensive approach. Anger or self-pity isn't helpful.
A strategic approach requires the emotional strength to treat reputational difficulties as understandable -- even predictable -- challenges that should be expected in today's business environment. Companies and chief executives must handle reputational crises like any other major business challenge: based on principled leadership and supported by sophisticated processes and capabilities that integrate with the company's business strategy and culture. Their reputational trust depends on it.