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Home > Business Strategy Best Practice > A Holistic Approach to Stakeholder Relations to Build Reputation and Mitigate Reputation Risk

Business Strategy Best Practice

A Holistic Approach to Stakeholder Relations to Build Reputation and Mitigate Reputation Risk

by Elliot S. Schreiber

This Chapter Covers

  • Understanding stakeholder expectations and potential risk.

  • The impact of social media on reputation and risk.

  • Recognizing, assessing, and managing potential risk.

  • The establishment of stakeholder relations councils for managing reputation and risk.

  • A strategic process, called DIFFERS, that helps identify, access, and manage reputation risk.

  • Recommendations for both boards and management.

Introduction

Concerns among boards and CEOs about corporate reputation and the risk to reputation have increased dramatically in the past decade (Economist Intelligence Unit, 2005). According to a study of 551 companies by AON Insurance (Varro, 2009), reputation risk is now the number one concern of senior executives and risk managers globally and is one of the top risk concerns of CEOs.

Senior executives find reputation harder to manage than other types of risks, due to its “amorphous” nature as a “risk of risks” (Tonello, 2007). That is, any risk, whether internal or external, can materialize into a reputation risk. It is troubling, then, that the AON and Conference Board Commission studies found that about 66% of companies have no formal plan in place to manage reputation risk, and that companies are confused about who is responsible for reputation risk and how best to coordinate the issue within the company. Responsibilities for reputation are often fragmented among a number of business managers, leading to poor coordination and continuity, which in turn can undermine reputation and increase risk.

Given the ways that social media have empowered stakeholders, and the growing globalization of companies, reputation risk will only increase for most organizations. Yet there is little guidance that can be found in the professional or business literature that offers advice on how best to manage reputation.

This chapter aims to addresses the gap in business knowledge about managing reputation and reputation risk. The author will provide both an organizational structure that companies can use to manage reputation and reputation risk and a strategic process map, both of which are being used at a variety of international companies and small, not-for-profit organizations.

What Is Reputation?

Corporate reputation is what people generally say about a company’s character, performance, or what the company stands for. It is found in stakeholders’ familiarity, favorability, and attribute assessments regarding the company as compared to others within a relevant set (for example industry, community, etc.). Reputation translates into the expectations of financial, operational/business, and social value that a range of stakeholders have of an organization, often in comparison to others in the same industry (Korschun, Schreiber, and Andras, 2010). So, for example, for customers value may be a fair price or quality. For employees, it may be a good job, good pay, and good working conditions. For prospective talent, it may be a good place to work. For the community, it might be a company that is a good corporate citizen.

There are several operative terms in this definition of corporate reputation. First, reputation is based on expectations of value that stakeholders believe that they have—or have a right to expect—from the organization. We can define a stakeholder as any person or organization that believes that they have a right to expect some value from an organization, and that are willing and able to act on that expectation, either positively or negatively. For example, employees expect to receive appropriate pay and an acceptable work environment. To the extent that an organization exceeds these expectations, it becomes known as a good place to work, while those that barely meet or fall below these expectations gain a reputation for having a poor workplace environment.

Every stakeholder can either create or destroy value, either directly, or in concert with others. As stakeholder expectations go unfulfilled, there is greater chance of action that can damage reputation being taken against the organization. For example, a nongovernmental organization (NGO) might believe that it has a right to hold an organization to its standards of conduct. If the organization does not meet those expectations, the NGO might “go public” with accusations or demands that could impact the perceptions of the company held by other stakeholders, including employees and customers.

Second, reputation is not monolithic, but rather is stakeholder-group specific. There are often vast differences in the expectations of value across employees, investors or customers, or other stakeholders.

Third, reputation is competitive. Stakeholders judge companies within their industry sectors. In every sector, however, research has found that companies with the best reputations consistently outperform those with poor reputations on every financial measure. There is, then, financial value in reputation, since those with the best reputations enjoy lower cost of capital and credit, attract and retain the best talent, and outperform others in their sector in market capitalization.

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Further reading

Books:

  • Elkington, John. Cannibals with Forks: The Triple Bottom Line of 21st Century Business. Oxford: Capstone Publishing, 1997.
  • Fombrun, Charles J., and Cees B. M. Van Riel. Fame and Fortune: How Successful Companies Build Winning Reputations. Upper Saddle River, NJ: FT Prentice Hall, 2004.
  • Kossovsky, Nir, and Todd A. Miller. Mission Intangible: Managing Risk and Reputation to Create Enterprise Value. Pittsburgh, PA: Intangible Asset Finance Society, 2010.
  • Larkin, Judy. Strategic Reputation Risk Management. London: Palgrave MacMillan, 2003.
  • Low, Jonathan, and Pamela Kalafut. Invisible Advantage: How Intangibles Are Driving Business Performance. Cambridge, MA: Perseus Publishing, 2002.
  • Reichheld, Frederick F. The Loyalty Effect: The Hidden Force behind Growth, Profits and Lasting Value. Boston, MA: Harvard Business School Press, 1996.
  • Sexton, Donald E. Value above Cost: Driving Superior Financial Performance with CVA, the Most Important Metric You’ve Never Used. Upper Saddle River, NJ: Wharton School Publishing/Pearson Education, 2009.

Articles:

  • Balmer, John M. T., and Guillaume B. Soenen. “The Acid test of corporate identity management™.” Journal of Marketing Management 15:1–3 (1999): 69–92. Online at: dx.doi.org/10.1362/026725799784870441
  • Barton, Dominic. “Capitalism for the long term.” Harvard Business Review (March 2011). Online at: hbr.org/2011/03/capitalism-for-the-long-term/ar/1
  • Couts, Andrew. “Apple makes 50% of all handset industry profits, analyst says.” Digital Trends (July 9, 2011). Online at: tinyurl.com/455wd2k
  • Eccles, Robert G., Scott C. Newquist, and Roland Schatz. “Reputation and its risks.” Harvard Business Review (February 2007). Online at: hbr.org/2007/02/reputation-and-its-risks/ar/1
  • Friedman, Milton. “The social responsibility of business is to increase profits.” New York Times Magazine (September 13, 1970).
  • Martin, Roger. “The age of customer capitalism.” Harvard Business Review (January–February 2010). Online at: hbr.org/2010/01/the-age-of-customer-capitalism/ar/1
  • Obloj, Tomasz, and Krzysztof Obloj. “Diminishing returns from reputation: Do followers have a competitive advantage?” Corporate Reputation Review 9:4 (December 2006): 213–224. Online at: dx.doi.org/10.1057/palgrave.crr.1550029
  • Porter, Michael E., and Mark R. Kramer. “The big idea: Creating shared value.” Harvard Business Review (January–February 2011). Online at: hbr.org/2011/01/the-big-idea-creating-shared-value/ar/1
  • Roberts, Peter W., and Grahame R. Dowling. “Corporate reputation and sustained superior financial performance.” Strategic Management Journal 23:12 (December 2002): 1077–1093. Online at: dx.doi.org/10.1002/smj.274
  • Varro, Alex. “Aon announces top 10 global risks.” Insurance Networking News (April 21, 2009). Online at: tinyurl.com/64h6gwa
  • Vergin, Roger C., and M. W. Qoronfleh. “Corporate reputation and the stock market.” Business Horizons 41:1 (January/February 1998): 19–26. Online at: dx.doi.org/10.1016/S0007-6813(98)90060-X
  • Yarrow, Jay. “Apple has 50% of the profits from major phone makers.” Business Insider (May 2, 2011). Online at: tinyurl.com/3z23tr8

Reports:

  • Altman, Daniel, and Jonathan Berman. “The single bottom line.” June 13, 2011. Online at: tinyurl.com/6k3ldws [PDF].
  • Bayer, Daniel Sandy, and Ellen S. Hexter. “Managing reputation risk and reward.” Report no. R-1442-09-RR. Conference Board, March 2009.
  • Brancato, Carolyn Kay, Ellen S. Hexter, Katharine Rose Newman, and Matteo Tonello. “The role of U.S. corporate boards in enterprise risk management.” Report no. R-1390-06-RR. Conference Board, June 2006.
  • Conference Board. “Commission on public trust and private enterprise: Findings and recommendations.” Report no. SR-03-04. January 2003. Online at: www.conference-board.org/pdf_free/sr-03-04.pdf
  • Economist Intelligence Unit. “Reputation: Risk of risks.” December 2005. Online at: www.eiu.com/report_dl.asp?mode=fi&fi=1552294140.PDF
  • Gu, Feng, and Baruch Lev. “Intangible assets: Measurement, drivers, usefulness.” Working paper. 2001.
  • Korshun, Daniel, Elliot S. Schreiber, and Trina Larsen Andras. “Corporate reputation and the new stakeholder capitalism.” Working paper, Center for Corporate Reputation Management, Bennett S. LeBow College of Business, Drexel University, 2010.
  • Schreiber, Elliot S. “A framework and process for aligning the organization to enhance reputation by maximizing perceived competitive value.” 14th International Conference on Corporate Reputation, Brand, Identity and Competitiveness, Rio de Janeiro, Brazil, May 19–21, 2010.
  • Tonello, Matteo. “Reputation risk: A corporate governance perspective.” Report no. R-1412-07-WG. Conference Board, December 2007.
  • Torok, Robert, Carl Nordman, and Spencer Lin. “Clearing the clouds: Shining a light on successful enterprise risk management.” IBM Institute for Business Value, June 2011. Online at: tinyurl.com/3peg5df [PDF].
  • Watson Wyatt. “Human capital index: Human capital as a lead indicator of shareholder value.” 2002. Online at: www.watsonwyatt.com/research/printable.asp?id=W-488

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