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A Bad Year for Good Corporate Reputations

Five lessons to keep in mind before a reputation crisis hits.

The year 2010 will be remembered as the most tumultuous year for corporate reputations since 2002, when WorldCom and Tyco imploded on the heels of Enron in late 2001. But what made the events of 2010 different was that reputational harm affected three of the most admired companies in the world: Toyota, Goldman Sachs and Johnson & Johnson. Obviously, BP suffered far greater reputational damage, but most corporate reputation ranking systems did not place BP at the levels of these three giants because of the fatal 2005 explosion at their Texas plant and the 2006 Alaska pipeline spill.

In a world where Web- and mobile phone-based technological change is relentless and politicians need to show they are defending the public from abuses by “fat cat” companies, what are the lessons that C-suite executives can learn from the events of 2010?

Lesson 1: Corporate reputation is a financial issue, not merely a so-called “intangible asset” that can be left to corporate communications departments to manage alone. Toyota received a credit downgrade as a result of the anticipated sales impact of the unintended acceleration problems and as recently as November, was the only major auto maker to report a decline in U.S. sales, despite months of incentives and massive advertising. Goldman Sachs paid the government $550 million to settle the SEC suit over the controversial Abacus CDO, and saw its share price decline 20 percent after the suit was announced. Johnson & Johnson reported that its third quarter sales were “significantly impacted” by the product recall and manufacturing suspension at its Ft. Washington, Pa. plant. And BP invested $20 billion in the fund to repay those harmed by the spill, among many other costs. Real money is at stake when a major crisis occurs.

Lesson 2: If a major company has a serious crisis, it had better assume that its CEO is going to pay a visit to Washington, D.C. and be grilled by a Congressional committee in the white hot media spotlight. This public scourging began during the darkest days of the financial meltdown with the CEOs of major banks and auto makers, and it appears that it has become institutionalized. The CEOs of Toyota, Goldman, BP and Johnson & Johnson all made the trek this year. CEOs of large public companies should be trained in handling aggressive public inquiries that are carried live on TV and webcasts well before a crisis hits.

Lesson 3: A traditional rule of crisis communications holds that the CEO must be the spokesperson or the company’s response will not carry the credibility such a grave situation requires. BP, with by far the worst of the four major crises of 2010, tried that with Tony Hayward, who went way off script too often, damaging BP’s credibility. The lesson is, if the CEO is a strong communicator, he or she should play the role. If not, use another communications-savvy senior executive, as BP learned the hard way.

Lesson 4: It’s become more challenging to manage a crisis because of the rise of blogging and other forms of social media. Crises used to be driven entirely by daily newspapers, evening news broadcasts and then 24-hour cable networks and news media web sites. All are still critically important in shaping the public’s interpretation of a crisis, but social media has created an always-on cacaphony that continues to buzz throughout a crisis and impact mainstream media and public perception. The instant commentary on Twitter and Facebook by “influencers” including elected and government officials as well as the general public feeds an expanding shock wave of bad news at all hours across all time zones. Corporations should employ social media experts who know how to build a network of fans and followers well before a crisis occurs.

Lesson 5: Companies should communicate regularly their social responsibility programs to build allies in government and in their local communities. This “bank of good will,” if strong enough, also helps create a network of supporters who can be tapped to advocate for the company in a crisis situation. While it is now post-crisis, Goldman Sachs is actively promoting its excellent “10,000 Small Businesses” program as part of its reputation rebuilding strategy.

Finally, how many CEOs and CFOs know what kind of crisis communications capability their company has? The odds are that they have never read the company crisis manual, if it exists, and have not participated in crisis drills. They generally leave crisis management entirely in the hands of corporate communications. And still fewer companies undertake annual reputational risk audits to attempt to predict what issues on the horizon may wash ashore as a tidal wave of damaging news. Given what happened to “gold-standard” companies like Toyota, Goldman and Johnson & Johnson as well as BP, it seems logical that boards of directors should request these “reputational stress tests” from management.

If a C-suite team doesn’t want to put in the considerable time it takes to prepare a company for a major crisis, it can always purchase an insurance policy to get someone else to clean up the mess. At least one broker, DeWitt Stern, is selling a policy that covers corporations for up to $50 million in PR and advertising costs if a crisis damages a company’s reputation.

Andy Tannen is senior vice president and director of strategy development, MSLGroup

About andy tannen

Andy Tannen is Senior Vice President, Director of Strategy & Development at MSLGroup.