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Expert Risk Articles

Building a Base of Trust

A positive company image or a strong brand is not a matter of chance. Reputational risks can now be measured, managed – and even covered.

 

Reputational risk - the silent threat

The cell phone maker Nokia revealed its plans to the world in January 2008 to shut down its plant in Bochum, Germany, and transfer the jobs to Romania. The news sent outraged unions and employees pouring into the streets and created a huge story for the mass media. But Nokia itself failed to bring across the rationale behind its decision. Instead, it watched from the sidelines as consumer confidence in the company evaporated and its market share in Germany dwindled.

Nokia is by no means the only company whose reputation has been subjected to a public flogging. You may recall Toyota and the barrage of complaints in the United States about unintended vehicle acceleration, BP and the accident at the Deepwater Horizon oil platform, and the Japanese energy company Tepco and the reactor disaster at Fukushima. Companies that ignore the power of the media and public opinion are at risk at having their images besmirched. Subsequently, they might suffer a series of blows to their business operations, including falling stock prices, lost customers, increased regulation and reduced attractiveness as an employer.

Toyota's brake problems caused their reputation to suffer

A new challenge: social media

Image has been a key competitive factor for a long time. Today, companies are being submitted to increasingly intense public scrutiny and have to use image and brand equity as ways of honing their competitive edges in saturated markets. A solid reputation lowers financ ing costs, saves advertising money, reaches new customer groups through recommendations by current customers, and creates a bank account of trust that can be tapped during a crisis. 

As a result of the rapid expansion of the Internet and social media like Facebook, YouTube and Twitter, it has become even more difficult to wrap a good image in a protective coating of Teflon. In addition to traditional media, a limitless array of blogs and forums has emerged, enabling users to create and disseminate their own content. Some of this content can pose a threat to a company’s reputation. One good example is the viral “United Breaks Guitars” video. Country singer, Dave Carroll, claimed his guitar was damaged while being transported by United Airlines, and afterwards was repeatedly denied compensation by the airline’s customer service agents. The incident prompted him to write the song “United Breaks Guitars” and then upload it onto YouTube – the video has now been watched more than 11 million times. In the face of this assault on its image, United Airlines agreed to pay compensation. Nonetheless, the airline’s image took a tremendous beating. Social media have become popular ways of applying pressure to companies. In many cases, however, the information posted there jumps onto the radar screens of a mass audience only after reports on the issue by agenda-setting media.


 

Manage reputation

Even in the Web 2.0 era, a positive image is not simply a management achievement that generally rests in the hands of marketing and communication departments. Professor Frank Brettschneider calls image a “strategic asset” – one that must be consciously invested in and cultivated. Reputation is now measurable, to a limited extent, because quantitative and qualitative data from past decades are available. To track changes in reputation scores, one practical approach is to continuously monitor traditional media (print, TV, online offer ings), as well as social media platforms, and to analyze the content there. This is generally an early indicator of reputational risks as well as customer and market behavior. This form of media analysis should be supplemented by regular surveys of customers, employees and members of the general public, and then compared with trends among key company performance indicators, including revenue and stock price. Dashboards consolidate all relevant information in a platform and then continuously and reliably feed information about a company’s current reputation to risk management.

Reputations are especially difficult to protect in the virtual world.

No “end-of-pipe“ activity

Should the analyses reveal that a company’s image is not in line with its actual or desired objectives, steps can be taken to lessen the reputational risk or improve the image. If the quality of a company’s products and services is objectively good compared with its competitors, but its image is poor (for example, as the result of a spectacular incident played up by the media), targeted communication can then be undertaken to wipe the tarnish from the image. Here, reputation management should not be viewed as an “end-of-pipe” achievement. Rather, it should be a continuous part of the strategic decision-making, risk and change processes.

In summary, reputation is more and more crucial for the success and survival of companies. It is now measurable as qualitative and quantitative data exist, and therefore can be managed systematically, along with other corporate assets.