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Home > Business Strategy Best Practice > Long-Term Reputation Effects in the Global Financial Industry: How the Financial Crisis Has Fundamentally Changed Reputation Dynamics

Business Strategy Best Practice

Long-Term Reputation Effects in the Global Financial Industry: How the Financial Crisis Has Fundamentally Changed Reputation Dynamics

by Mark Eisenegger and Daniel Künstle

This Chapter Covers:

  • The Memorizing Resonance Reputation Index (MRRI)—a novel measuring procedure for analyzing long-term reputation dynamics.

  • The long-term reputation trends of globally active major banks between 2002 and 2011.

  • The basis of the study is the reputation-relevant reporting by 24 media from the Swiss, German, UK, US, and Asia-Pacific arenas. Some 200,000 media articles were evaluated.

  • The MRRI shows a highly significant correlation between the long-term reputation trends of the analyzed banks and a stock index of comparable composition.

  • Moreover, the MRRI shows that socioethical assessments of the banking industry gained quickly in importance after 2009 and led to a massive recasting of social reputation after 2010. Concurrently, economic assessment criteria became less significant.

  • To counter the resulting limitation of their economic potential, the analysis suggests that companies in general and banks in particular should shoulder their macroeconomic responsibilities in a proactive way. Since the onset of the financial market crisis, the role of corporate social responsibility (CSR) has become more acute.

  • The increased taking on of macroeconomic responsibility by the global financial industry is not only a social obligation, but represents a conditio sine qua non for the economic survival of the companies concerned.

Introduction

The financial market crisis of 2007, global economic crisis, and subsequent debt crisis have moved the concept of reputation into the very center of public debate. Ever since the reputation meltdown of the Wall Street banks, insurance companies, rating agencies, supervisory authorities, and entire national economies, there has been a veritable boom around this concept—in the media and scientific discourse, but also in the daily practice of management consultants.

In fact, reputation performs fundamental functions for society as a whole, as well as for the economy. Selective nurturing of the parameter of reputation thus acquires central significance. However, many companies, authorities, and other actors of public life frequently suffer the problem of continuing to depend too strongly on gut feeling in managing their reputation. There is, in particular, a lack of instruments that can validly determine long-term reputation dynamics as a basis for a reputation management that benefits the organization.

This chapter responds to this weakness with an approach to reputation that places long-term reputation dynamics at its center. It starts by clarifying the fundamental significance of media-broadcast communications in the process of reputation formation. The novel Memorizing Resonance Reputation Index (MRRI) procedure for determining long-term reputation dynamics is then introduced. Finally, a case study is presented on the effects of the financial market crisis on reputation dynamics in the global bank sector.

Public Communications—The Conditio Sine Qua Non of Reputation Formation

Without public communications, and in particular without the permanent background of media reporting, we would be unable to develop a clear idea of society. The media arena is the principal access portal to modern society; we look into this arena and form a picture of our society, the economy, and the companies in the news. The sociologist Niklas Luhmann has described the media arena as a gigantic mirror of society, reflecting its events and processes, and mirroring them back to its members: “What we know about our society, indeed about the world in which we live, we know via the mass media” (Luhmann, 1996, p. 9). The significance of the media arena as an information source quickly becomes clear when we imagine scenarios in which we struggle to find something to talk about, such as in classic small-talk situations. Even if nothing else relates to us, we can converse about the latest news and most current media topics at any time, with anyone, no matter how little we know them.

However, the media arena is more than just a gigantic social mirror. It also forms a communications platform, comparable to an infinitely large stage, which has become further extended with the advent of social media. Not only journalists appear on this stage and express their views and opinions, but all relevant social actors striving for attention, including those from the sectors of politics, economics, science, and society, concentrate their activities on this media platform. Hence, the financial market crisis was turned into a significant communications event merely because it was not only journalists who expressed opinions on the causes and consequences of the crisis in the media, but also prominent politicians and government representatives, economics professors, Nobel laureates, analysts, stock market legends, and leading investors. So it’s not enough to reduce media communications to journalists alone. Politicians, scientists, experts, analysts, and nongovernmental organizations (NGOs) bestride the media platform with their topics and events, and, in this way, make it truly powerful.

What, thus, also makes the media arena significant in the economic sector are the circumstances below.

  • Broad segments of society follow economic events ever more exclusively via the media (media as mirror).

  • All key economic actors—such as analysts, investors, and economic experts—concentrate their estimates and ratings on the media arena (media as platform).

When rating agencies such as Standard & Poors, Moody’s, or Fitch downgrade indebted countries such as Greece, Portugal, or even the superpower United States, we can know this immediately only because these agencies announce their ratings via the media. It is precisely this double function—as mirror and platform—that explains the central significance of the media for the economy: the media arena is the most important information source for economic events, and it is simultaneously the central platform and stage for all those actors who determine how share prices, markets, or business cycles develop. So, it is hardly surprising that empirical reputation research shows a close correlation between reputation curves and share prices. Experts, analysts, and investors observe economic events via the specialist and mass media, and simultaneously announce their assessments via media channels.

Instruments that aim to record key reputation dynamics in the economy and society are consequently obliged to specialize on an analysis of the media arena, i.e. that place where trust in companies and the economy grows or fades. Moreover, such instruments require a long-term perspective. Nothing harms the reputation of an actor more than chasing fast-changing ephemeral trends in an inflationary manner. Reputation management means validly recording the truly decisive reputation dynamics that have grown over the long term and harmonizing them in an authentic way with one’s own organizational profile. The lack of suitable instruments for modeling the long-term changes of relevant reputation dynamics results in the risk of reputation management overlooking key trends or weighting them incorrectly.

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Further reading

Books:

  • Eisenegger, Mark. Reputation in der Mediengesellschaft. Konstitution, Issues Monitoring, Issues Management. [Reputation in the Media Society. Constitution, Issue Monitoring, Issue Management.] Wiesbaden, Germany: VS Verlag für Sozialwissenschaften, 2005.
  • Eisenegger, Mark, Mario Schranz, and Jörg Schneider. “Corporate reputation and the news media in Switzerland.” In Craig E. Carroll (ed). Corporate Reputation and the News Media: Agenda-Setting within Business News Coverage in Developed, Emerging, and Frontier Markets. New York: Routledge, 2010.
  • Luhmann, Niklas. Die Realität der Massenmedien. [The Reality of the Mass Media.] Leverkusen, Germany: Westdeutscher Verlag, 1995.

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