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Your Firm’s Good Name

August 13, 2010
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Trust

Revelations of mismanagement, risky lending practices, improper financial reporting, inappropriate CEO behavior and sheer greed have turned once-stellar corporate reputations shaky and so-so ones to dust. Toyota, Tiger Woods, AIG and the entire financial services industry are just a few whose reputations have been tarnished during the past year.

While it’s possible that there has been an increase in bad behavior among companies, it’s also clear that reputation is under more scrutiny than ever due to the fast pace of the media cycle and the intense interest in business news. Social media have taken away some of the control that companies once had over their reputation, as well, putting it in the hands of customers, observers and even agitators.  

“Much more so today, reputation management becomes an important part of risk management,” says Joseph Johnson, an associate professor of marketing at the School of Business. He points to the downfall of the financial sector, where 200-year-old banks were swept away in just a few months when their reputations went downhill. “When something bad happens to a big firm, markets really punish you,” he adds. 

Consider Toyota. Once revered as the leader in automotive quality, the company has recalled some 8 million vehicles in recent months, following complaints about uncontrolled acceleration or malfunctioning brakes. When the problems were revealed, the company tried first to blame them on improperly installed floor mats, then on one of its parts suppliers. By the time Toyota got around to taking responsibility, its reputation was so damaged that some say lost sales and the repairs it must make could cost it some $2 billion this year. 

The School’s faculty experts on branding, trust, finance, leadership and management all look at reputation from different perspectives, but they all agree: The bottom line is that any company that is not concerned about its reputation should be. Reputation has an impact on everything from the choices consumers and businesses make about which products and services they buy, to employee retention and recruitment, to a company’s access to and cost of capital. Investors are more likely to put money into a company they consider reputable, employees are more motivated when they hold the company in high esteem, and consumers like to buy from companies they trust. A good reputation, say the School’s experts, boils down to this: Do what you say you will do, be what you say you are, and deliver on the expectations you set. 

It Begins with Trust 

While reputation was once simply built on the perceived quality of a company’s products or the competence of its services, today it is far more abstract, formed in part by such factors as the interactions people have with a company, trust in a company and its management, and the reputation of company leadership. In addition, reputation derives from what people say about a company — and with the advent of social media such as Facebook and Twitter, that means anyone can join the conversation. 

Companies concerned with earning a good reputation, maintaining that reputation or repairing it when something goes awry need to keep all of these factors in mind, but the foundation is trust. “In times of economic uncertainty, and in the face of these Ponzi schemes and all sorts of other things where people feel duped, reputation is based on trust,” says School of Business Dean Barbara E. Kahn. Indeed, research by the Edelman Trust Barometer, which surveys opinion leaders about their attitudes toward corporations, found that Americans view trust and transparency as more important to corporate reputation than the quality of products or services. 

But trust can be difficult to pin down. Generally, it is defined as the trusting party having confidence in the trusted party’s competence, benevolence and integrity, says Chester Schriesheim, University Distinguished Professor of Management. He breaks those three components down further: Competence is the perceived ability to accomplish or help accomplish goals that are important to the other party; benevolence is the sense of having positive or helpful intentions toward the other party; and integrity is seen as congruence between words and deeds. To establish trust and develop a good reputation, a company generally must develop a relationship with its customers, and the relationship has to be dynamic, meeting their needs as they change. “You’re seeing reputations that are based not only on understanding customers but also on understanding customers over time,” Kahn says. 

Juliano Laran, an assistant professor of marketing who studies consumer behavior, agrees. “Consumers will trust the companies that try to develop relationships with them,” he says. “You do that by doing exactly what customers want, [and then] do more than expected.” 

Consumers who repeatedly have good experiences with a company will give that company a lot of leeway when it comes to potentially damaging transgressions. “Once we feel like something is really to our benefit as a consumer, we start looking for the positive aspects of everything and just hide the negative information,” Laran says. “People will actually become blind to these lapses.” 

your firms good name graphicThe Rise of the Celebrity CEO 

A company’s reputation is also influenced by the character of its top executives, who are increasingly public figures whose private lives matter. 

“Do perceptions about an organization’s leader influence perceptions about the company as a whole? Absolutely,” says Linda Neider, the School’s vice dean for undergraduate business programs and a professor of management. 

Having a well-known CEO can boost a company’s stock price and the business opportunities available to it. “The CEO’s fame, if you will, merges with the company and the company gets on the radar of important people, politicians, etc.,” says Patricia Sanchez Abril, an assistant professor of business law at the School. At the same time, some research indicates that a company’s bottom line does not necessarily rise with its CEO’s celebrity status. And, she cautions, “hitching a company’s reputation to one human being can be quite costly.” For example, Apple Inc.’s reputation is very much tied in with CEO Steve Jobs, whose illnesses during the past couple of years have created volatility for the company’s stock. 

It’s not just the potential loss of a leader perceived to be integral to a company’s success that can affect reputation. Abril says people also look at a chief executive’s behavior in his or her personal life — for instance, doing drugs or spending lavishly — and wonder what that says about the person’s respect for the law, prudence, or how those activities might affect his or her decision making on the job.  

“After all the corporate scandals of the early 21st century, people are more likely to hold CEOs accountable for their private actions because the public is looking for evidence of the leaders’ moral fabric,” Abril says. “The law, in turn, is less likely to protect their personal lives because their moral fabric is legitimately newsworthy and affects important public issues.” 

Teresa Scandura, a management professor, adds, “In times like this, I think reputation becomes more important and harder to maintain. Everything that a CEO does or everything that a manager does gets scrutinized.” Perhaps no stakeholder is influenced by a chief executive’s reputation more than a company’s employees, say Neider and Schriesheim, who have done extensive research on leadership and reputation. The CEO’s reputation is strongly linked to how committed and engaged employees feel in their jobs. “Organizationally, there is no doubt the extent to which employees believe their leaders are trustworthy and ethical has an effect on their motivation and willingness to commit to the leader’s vision,” Neider says. 

“The reputation of companies is so crucial, particularly to retaining and attracting top talent,” Schriesheim adds. They explain that over the past several years, the greed and corruption that have come to light at the highest levels of blue-chip companies have made employees cynical and given them what they describe as a “thirst” for authentic leaders. Authentic leaders, according to their research, possess integrity, humility and moral fortitude, and consistently practice the company’s — and their own — stated values. 

Scandura, who is an expert in the relationships between managers and employees, stresses that for employees to hold their company in good stead, the entire management team, from the CEO on down, must be aligned with the company’s core values. And, she says, an individual’s direct manager can have an impact on the way that person perceives the company. 

Managers can positively affect company reputation in several ways, Scandura says. One-on-one meetings with direct reports give them the chance to talk about the company’s values, listen to people’s concerns and respond appropriately. They can also build teams for special projects and give leadership roles to other staffers, offering them the chance to demonstrate those values. 

Reputation’s New Frontier: Social Networks 

Management interaction with employees is one of the oldest ways of forming company reputation. The newest way is through social networks, a potentially scary frontier that includes blogs, Twitter and Facebook. 

Certainly, social networks have been a boon to many companies, making them more accessible, says Abril, who has done extensive research on the topic. “When a big corporation can be your ‘friend’ on Facebook, all of a sudden it becomes almost human,” she says. It also lets a company stay in touch with its customers in a way that was not possible before. 

At the same time, social media give a platform to anyone with something to say, reducing the control companies have over their reputations. “It is harder than ever for companies to manage their reputations online. That’s why an online presence is so important — you want an opportunity to monitor and react quickly,” Abril says. 

To safeguard its reputation, a company must learn how to communicate through social media, says Dan Sarel, an associate professor of marketing who teaches courses on managing communications. Most important, he says, is to understand that communication is a two-way street: a company needs to listen to what is being said in the blogosphere, the Twitter-verse, on Facebook, Yelp, TripAdvisor and elsewhere, and respond honestly and in a way that furthers the conversation, rather than tries to dominate it. Take people’s feedback seriously, he advises, because if a company is not honest or its response is just talk, the online world will quickly reveal it. 

“Consumers are controlling the conversation,” Sarel says. “You need to learn to work with it and participate in this discussion. You can’t control it. You should listen to it, learn from it, and respond to concerns raised by participants.” There’s no magic bullet, though. The online world is constantly evolving, and companies must try different ways of communicating. Mistakes will happen, Sarel says, but companies should learn from them, change their strategy and move on. “Unless you know what is going on and unless you participate in the discussion, you are completely losing control of your reputation,” he says. 

Sarel notes that a proactive approach to reputation management is key in today’s fast-paced, globally connected business world. And that’s not just in the realm of social networks — it should be an important part of every aspect of a company’s business. No matter how well a company communicates, if its service or product is not what the customer expects or is not delivered with a positive experience, its reputation will suffer. 

“Reputation is really determined in every interaction the consumer has with an organization. Therefore, every employee’s responsibility is to contribute to that,” Sarel says. He recommends that an executive at an organization’s highest levels drive reputation management by taking a clear, companywide approach. “Internal communication across departments and functions is essential for ensuring a cohesive and consistent message,” he adds. 

Getting Back Your Good Name 

Even the best-managed reputation may suffer bumps. When a defective part, lavish expenditures, a stock-options scandal, misuse of funds or worse damage a company’s reputation, fast action is required to restore it. The way to do that is to signal repentance by apologizing or paying a price in some way, according to Cecily Cooper, an assistant professor of management who has done extensive work in trust repair. 

“As an organization, you need to address what has happened in the past. So whatever it was that you did, you need to make that right,” Cooper says. Signaling repentance requires that the company pay a price — either a financial repayment, sometimes with additional compen sation, or a verbal repayment, such as an apology. What’s important is that the company takes responsibility for failing stakeholders, investigates the cause of the failure (if not known), and is transparent in its communications. 

In addition to addressing what occurred in the past, Cooper says that companies’ trust-restoration efforts should go one step further and include a future-oriented response. That often takes the form of a self-imposed monitoring system, such as a customer bill of rights or an oversight committee. “People have to believe that the company won’t re-offend,” she says. 

Repairing reputation can be even trickier when the CEO commits the transgression. If the CEO will be staying with the company, it’s important he or she initiates the signals of repentance and pays a cost for whatever went wrong. If the CEO is leaving, a company’s board of directors can initiate the repair effort — for instance, demanding a CEO apologize or return some compensation. 

Schriesheim says that in order to restore its reputation and repair trust, a company has to address the specific component of trust that it is perceived to have breached. If it doesn’t, repair actions can be unsuccessful. Going back to Toyota, for example, the company’s early communications related to its recall were geared toward trying to convince people of its benevolence. “I think that in their case, they’re dealing with an issue of competence,” Schriesheim says. “They’re probably going to be best advised to communicate clearly that they have the technical competence to diagnose the problem, develop solutions and deliver them effectively. … Then they need to basically communicate the fact that they have integrity — that what they say … is what they actually believe in.” 

Putting a dollar value on Reputation 

The consequences of not managing or repairing reputation the right way are significant: lost customers, wary investors, demoralized employees, derailed mergers and more. It’s clear that these consequences affect a company’s finances. But how exactly do you put a financial number on reputation? 

It’s often easier to think about the value of a good reputation by looking at the potential costs of a damaged one. Elaine Henry, an assistant professor of accounting, presents one scenario: For professional services firms such as accounting firms or law firms, she says, “What they’re really selling is in large part their reputation, and that’s why the value of the company is essentially equivalent to the value of its reputation. If they lost their good reputation, the value of their firm would be zero.” 

The rest of the time, though, it’s a lot harder to put a dollar value on reputation. In general, valuation combines future cash flows and a discount rate. For cash flows, a damaged reputation could hurt sales as customers go elsewhere, pressure margins as remaining customers would pay lower prices, and increase costs as the company recalled products or increased advertising. For the discount rate, a company’s reputation may also be reflected in its cost of capital. “Capital providers care not only about a company’s financial strength, but also about the quality of a company’s financial reporting and the trustworthiness of management,” Henry says. “Damage to a company’s financial reporting reputation increases its cost of capital and, at the extreme, might even eliminate the company’s access to capital.” 

There are other ways to assess the financial value of reputation. “Accounting statements cannot measure something like reputation,” says Johnson, who has tried to examine its effect on a company’s stock price. 

In one study, Johnson and his colleague looked at what happened to companies’ stocks after Walt Mossberg reviewed their technology in his widely read Wall Street Journal column. They wondered whether his good reviews raised a company’s stock price and whether his bad reviews lowered it. They discovered that there is an effect, but it depends on the size of the company. When Mossberg gave a large company’s product a negative review, the company’s stock took a serious hit. But when a large company’s product received a positive review, there was very little rise in the stock. For small companies, it was just the opposite: a positive review caused a much larger jump in the stock price, whereas a negative review had very little impact. 

The difference, Johnson believes, comes back to expectations. People routinely expect a good product from a large company, so the reaction when a product is perceived as inferior is much stronger. But they have lower or no expectations from a small company, so the company gets a stronger bump from a product perceived as good. 

Of course, a stock market bump from a product’s good reputation can be temporary. The School’s experts stress that reputation is really formed over the long term. A company must build trust with all its stakeholders by delivering on and exceeding their expectations, then maintain its integrity and take responsibility quickly when things to awry.

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