White Paper 

 

HARLAN LOEB

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EDELMAN

DANIEL DIERMEIER

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KELLOGG SCHOOL OF MANAGEMENT 

Building a Reputation

 

Risk Management Capability 

 

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BUILDING A REPUTATION

Reputation and Its Risks

CEOs and board members routinely list

 reputation

 among their organizations’ most valuable assets.

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 Yet practically every month, a new reputational

disaster makes the headlines, destroying share-holder value and trust with customers and other

stakeholders. During 2010, leading companies

ranging from Toyota and Goldman Sachs to BP

and Johnson & Johnson battled severe reputational crises. Early this year the world anxiously watched

the Fukushima disaster accompanied with heavy criticism for its operator Tepco and the Japanese regulators. While the source or sources of each

crisis varies from case to case and from industry to industry, financial markets punish all the companies,

triggering a severe and sustained erosion of their

market values. Often the loss of public trust serves

as only the beginning of a company’s troubles as

lawsuits, public hearings and investigations ensue.

Often the loss of public trust serves as only  the beginning of a company’s troubles as lawsuits, public hearings and investigations ensue.

In some cases, public officials sense an opportunity

to pursue policy agendas or occupy the role of

heroes taking on corporate villains. In other cases, regulators and politicians may feel public pressure

to take decisive action that changes competitive

environments. One thing never wavers: observers

identify specific mistakes by senior management

and offer advice on how to avoid similar disasters. However, it would be a mistake to simply focus on

the specific tactical mistakes of any given calam-

ity and miss the broader trends that occur with

ever more frequency and severity. The

Economist 

 recently ventured that executives have about an

82 percent chance of confronting a corporate

disaster over the next five years, up from 20 per-cent a decade earlier.

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 The 2011 Edelman Trust Barometer, an annual survey of more than 5000

Informed Publics in 23 countries on five conti-

nents, found that quality, transparency and trust principally influence corporate reputations, while

consistent financial performance ranked at the

bottom.

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 Trust is now an essential part of business

success. Yet U.S. trust in business has declined over the past five years. This indicates that trust is fragile and needs to be re-earned. While trust in business remains higher in emerging markets,

non-governmental organizations (NGOs) are on

par with businesses in emerging markets and

more trusted in developed markets, including the U.S., further articulating the importance of third-party partnerships.

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  These developments warrant a broader explana-

tion. One factor reflects the rise in reputational risk

from increased public scrutiny. Companies now

operate in an ever-faster-moving news cycle, driven

by intense competition between 24-hour news

channels, wire services, and online news providers.  Add to that the rise of user-generated content, from blogs and Twitter to Facebook and YouTube. Social media not only is a medium for sharing information and opinion quickly and permanently, as the recent

WikiLeaks campaign illustrated, it also can help

diverse constituencies to better organize, as seen