Maintaining a strong reputation is critical for a company’s sustained success. Yet, almost every day a new crisis makes the headlines. These developments indicate a fundamental misalignment between growing reputational risk and its management.
The sorry state of corporate reputations
CEOs and board members routinely list reputation as one the company’s most valuable assets.1 Yet, every month a new reputational disaster makes the headlines, destroying shareholder value and trust with customers and other stakeholders. During the last year, leading companies ranging from Toyota to Goldman Sachs, and BP to Johnson & Johnson battled severe reputational crises. More recent examples include News Corp., Japanese nuclear operator TEPCO, or the German insurer ERGO. While the sources of the crisis may vary from case to case and from industry to industry, in all cases financial markets punished the companies leading to a severe and sustained erosion of their market values. Often the loss of public trust is only the beginning of a company’s troubles. Lawsuits, public hearings, and investigations soon follow. In some cases pubic officials may 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 the pressure of the public to take decisive action changing competitive environments.
In every single case, observers have pointed out specific mistakes by senior management and offered advice on how to avoid similar disasters. But it would be a mistake to just focus on the specific tactical mistakes in any given case and miss the broader trends that manifest themselves in ever more frequent and severe corporate crises. The Economist recently pointed out that executives have an estimated 82% change of facing a corporate disaster over the next five years, up from 20% a decade earlier.2 The 2011 Edelman Trust Barometer, an annual survey of over 5000 respondents in 23 countries on five continents, shows that quality, transparency, and trust are the main factors influencing corporate reputations, while consistent financial performance was at the bottom of the list. Trust is now an essential part of business success.