An important part of managing reputational risk is knowing the potential sources — supply-chain breakdowns, data breaches, CEO sound-bite blunders and poor customer service are but a few. But knowing how to react to a reputational crisis is vital, especially in the era of social media, when news, opinion and other information spread within seconds.
Take Domino’s Pizza, one of the world’s biggest pizza delivery chains. In 2009, employees at a store in the US filmed themselves violating health standards and common decency while preparing food supposedly bound for customers — then posted it on YouTube.
Domino’s responded two days later with a video of its own. In it, company president Patrick Doyle acknowledged that the incident had damaged the company’s brand, adding: “We want to thank you for hanging in there with us as we work to regain your trust.”
But by then, hundreds of thousands of people had viewed the employees’ video, and Domino’s had learned a cruel digital-age lesson: “We learned that we no longer owned our brand,” said Tim McIntyre, Domino’s vice president of communications. “We own the trademark, we own the business, but consumers own the brand. They determine how we are portrayed out in the world now.”
Executives predict social media will be among the most important risk sources over the next three years — ranked up there with the global economic environment, government spending and regulatory changes, according to Deloitte research. Companies can learn a lot from the Domino’s example: First, social media itself isn’t a risk — it can just expose bad behaviour to more people, more quickly. So some of the risk lies in response, or the lack thereof, which is the second lesson:
A quick, public response can help restore trust amongst stakeholders. The third, and perhaps most important, lesson: A quick response can only do so much because reputation — good or bad — is built over time; a good reputation is earned.
“Social media is merely the channel,” explained Nir Kossovsky, executive secretary of the Intangible Asset Finance Society and chief executive of Steel City Re, a company that sells reputational value insurance. “What the channel is conveying is what the company is actually doing. ... A company must be authentic in what it is doing because it is constantly under a microscope now, and the ability to have a reality that is different from its public story is very hard.”
Reputation and expectation
Reputation is what stakeholders — customers, employees, suppliers, creditors, equity investors, regulators — expect a company to do. It’s a forward-looking metric that covers areas such as ethics, innovation, quality, safety, sustainability and security, and how a company governs those factors, explains Kossovsky, the author of Reputation, Stock Price, and You: Why the Market Rewards Some Companies and Punishes Others and Mission: Intangible: Managing Risk and Reputation to Create Enterprise Value.
The value of that reputation is how the markets act based on those expectations, he explains. Markets reward companies for meeting expectations, and they punish them for failing to meet expectations. And that’s observable through a company’s share price and profit-and-loss (P&L) statement. A good reputation can increase margins and reduce borrowing costs, inventory lead time, head-hunting costs, internal litigation costs, regulatory fines and supplier costs. “When customers expect great things from a product or service, they’re willing to pay more and the sales cycle is shorter,” Kossovsky said.
Oxford Metrica employs a proprietary Value Reaction metric that captures the company-specific impact of an event in percentage and financial terms. It calculated that a 2011 service disruption on BlackBerry mobile devices cost Research in Motion nearly 50% of its value, which equated to more than $6 billion.
Preparation, not valuation
Indeed, companies can spend a lot of time measuring balance-sheet information, competitor and market performance, not to mention social media “friends” and “followers” to gauge the value of their brand or reputation. But the most important ingredient to managing reputational risk is preparation, not valuation, says Bonnie Hancock, the executive director of the Enterprise Risk Management Initiative at North Carolina State University’s Poole College of Management.
If a company’s official Facebook page has 1 million “likes”, what’s the value of that information? “And then, over time, if that dropped back to 800,000 because of some event, what does it actually mean in dollars?” Hancock asked. “I’m not sure there’s a lot of value in going through that exercise. At the end of the day, what are you going to do differently because you’ve calculated that value?”
So companies shouldn’t spend all their resources trying to calculate what a potential reputational hit is worth, she says. “Spend those resources instead being prepared to respond in the event that something happens that potentially damages your reputation. Think through how you’re going to respond and be ready to respond quickly to minimise any potential damage and potentially turn it into a positive.”
Most companies will, at some point, face serious reputational damage, according to Phillip Ellis, chief executive of the Global Solutions Consulting Group at Willis, an international insurance brokerage company. His firm’s research shows that large companies will face such an event every seven years, according to a 2012 white paper published by Willis.
Readiness matters in a viral world
Social media, while not a risk itself, has prompted companies to improve their reaction processes (see sidebars). The “viral” aspect — a comment or video clip’s ability to go worldwide in a short amount of time — is what’s prompting the preparation. Just 8% of public company audit committee members think their companies could respond adequately to a crisis that goes viral through social networks, according to KPMG research.
An effective response comes in three steps, Kossovsky explains. Companies should acknowledge the bad situation, commit to solving the problem and then “create some sort of standard that raises the bar for the entire industry,” he said. Just as Domino’s did.
The company acknowledged the situation, and it used the video incident to improve the way it does business. Domino’s bolstered its communication with customers soon after the video was released; it launched an official Twitter account ahead of schedule, for instance. The company also began requiring deeper background checks of job candidates, and it placed controls over the dissemination of in-store videos captured by employees, McIntyre said. And, for a time, the video was used as a code-of-conduct cautionary tale in franchisee training. After all, explaining expectations to employees is a big part of ensuring that a company meets the expectations of its other stakeholders.
“If your reputation is damaged, your brand is damaged,” said Domino’s CFO Michael Lawton. “Is that quantifiable? Only after the fact. We certainly know that our brand is worth a lot of money.”
Sales took a short-term hit in the weeks following the incident, which the company estimated to have cost between one and two percentage points in domestic same-store sales for that quarter.
But the market quickly forgave Domino’s for the video flap. The company’s share price, which suffered a slight dip in the days following the videos, recovered less than two weeks later. And within months, equity analysts were praising the company’s strategy for reporting better-than-expected earnings — a performance that was, as J.P. Morgan analysts put it, “commendable given a very difficult pizza industry backdrop as well as the brand’s negative publicity surrounding the YouTube event.” The market was predisposed to forgive, according to Kossovsky.
“If you are a company that in fact has controls — and Domino’s has phenomenal controls — you can pull this off,” he said. “And when you pull it off, everybody says, ‘You’re real, you’re authentic, you really care, you’ve done a great job, terrific. We love you.’ And the employees are happy, and the investors are happy, and the creditors are happy.”
And this year, Domino’s shares reached an all-time high.
Global security company G4S followed a similar three-step approach when it was facing a reputational hit last year.
The company won a £238 million (about $380 million) contract to provide 10,400 security personnel at the Summer Olympics in London. But as the Olympics neared, G4S was having difficulty filling all the positions — a scenario that ultimately forced the UK government to dispatch military personnel to cover the shortfall. News of the shortfall broke, and in less than a week the company’s share price had fallen 17.4%.
G4S acknowledged the situation, took responsibility for the cost of the government personnel and offered regular updates to stakeholders throughout the ordeal. It met with top investors and walked them through the company’s crisis-management plan. “The company deeply regrets that, despite the relentless efforts of so many of its people, it is unlikely to deliver in full its obligations to … everyone with an interest in these Games,” G4S said in a statement prior to the Olympics.
After the event, company executives sought to reassure employees and customers, paying visits around the world. The company also commissioned an independent review of the Olympics contract and its internal processes. G4S then released findings from the report. The company vowed to conduct more rigorous risk assessment of new contracts and improve contract take-on processes and project management. The company also said it would enhance oversight by requiring review and approval of contracts whose annual revenues exceed £50 million. And the company pledged to add at least two new non-executive directors and create a board-level risk committee.
G4S’s share price has recovered. And the company is looking to the future, which, for now, doesn’t include the Olympics. G4S has said it will not bid to be a security provider for the 2016 Olympics in Rio de Janeiro.
“To be honest, the profit upside, it would seem, is not as great as the reputational downside if it goes wrong,” Nick Buckles, the company’s chief executive, said in a conference call with analysts and investors.
Later during the call, he added: “We’ve got to rebuild that reputation. We’ve got a long-term track record of delivering excellent service, and we’ve got to make sure that we get that message across.”
Four response teams
Peter Hirsch, director of reputation risk at Ogilvy Public Relations Worldwide, works with companies on response to crises, which includes knowing where those crises could occur.
“We put them through what we call an issues mapping process,” he said. The companies try to “identify those places in their value chain where the evolution of events might identify or throw up new risks that they weren’t thinking about before.”
Once potential threats are mapped, plans begin to take shape. “If these things were to occur, what would be our response?” Hirsch said. “How would we handle it operationally, what would we say about it, and if there’s a pathway, how can we change what we’re already doing to remove the threat or mitigate its impact by doing something different today?”
Management accountants can help organise a four-team response system:
1. The monitors: Companies should have real-time monitoring of traditional and social media, so that they understand what the world is saying as they prepare their response.
2. The investigators: Companies should immediately deploy an operational team that is doing the fact-finding to make sure it knows what happened to cause the event.
3. The communicators: These are the people who are adapting and customising templates of content. Because emotion often gets in the way of decision-making clarity, it’s vital to be prepared for reputational hits instead of trying to craft a response mid-crisis.
4. The gatekeepers: This group, Hirsch said, is the go-between to all stakeholders. For example, if a company in the dental hygiene business has a product recall, that company’s gatekeepers would make contact with dentists, professional associations and pharmacies.
Nick Huber of Seven contributed to this article.
FOUR COMMON MISSTEPS IN CRISIS MANAGEMENT
There are four mistakes companies commonly make in trying to respond to a reputation crisis, according to Peter Hirsch, director of reputation risk at Ogilvy Public Relations Worldwide.
1. Rushing to identify the cause, person or entity responsible for the crisis event. Hirsch says that if this identification is premature, then companies end up having to spend precious time “backtracking, restating and refining” the messages they’re distributing.
2. Closing ranks. This is a natural human reaction. Sometimes leaders think, “Oh my God, this has happened to us,” Hirsch said. Instead, they should be thinking about the issue from the perspective of the stakeholders affected by the event.
3. Failing to distinguish between harm vs. pain. Companies must keep in mind whom their message might hurt. For instance, if an automaker’s top model is accelerating more than it should, leading to driver injury or death, it’s not in the best interest of that company to cite driver error as the reason for the acceleration, even if it’s the truth.
4. Declaring the crisis over. “It’s not over when you say it’s over,” Hirsch said. “The crisis is over when the stakeholders say it’s over. You need to stay in the game as long as there’s a perception that there’s more to be done.”