Corporate Reputation Matters, Experts Say

A few years back, David Frishkorn had to deal with what he calls “perceived accounting shenanigans.”

His employer’s business model was based on its ability to borrow money at a low cost, an ability that depended on its good reputation. Unfavorable perception caused the company’s low-cost borrowing to evaporate almost immediately. Frishkorn and other managers cut costs to arrest financial losses and then changed company policies to align them with corporate values and restore credibility in the long term.

“Reputation takes years to build and seconds to destroy,” said Frishkorn, now the vice president and chief compliance officer at Comverse Technology Inc.

Many companies know they need to maintain a good reputation to conduct or improve business. But rarely have they faced such a serious reputational challenge as financial and related industries do today, according to analysts.

Repairing Wall Street’s reputation, for instance, will be harder than it would have been 10 or 15 years ago: More is required of companies if they are to be highly regarded. Those involved with a company — employees, customers, local communities, activists and regulators — have agendas ranging from environmental protection to women’s rights, said Leslie Gaines-Ross, chief reputation strategist at Weber Shandwick, an international public relations company.

Moreover, nongovernmental organizations (NGOs) exert more influence in the marketplace than ever, she said, and — thanks to the Internet and mobile devices — NGOs are able to watch companies closely and mobilize quickly for action.

“It’s a new world,” Gaines-Ross said. “You cannot hide behind your company’s walls anymore.”

Corporations are under scrutiny, whether they do business in the United States, India, Brazil or anywhere else in the world, experts say.

Public trust and transparency are as important to corporate reputation as the quality of products and services, according to an international survey by Edelman, a global public relations firm.

Collaborating or partnering with NGOs often makes sense because those groups — generally more respected than corporations — can enhance corporate credibility and help business leaders figure out the best ways of exercising corporate responsibility, said Paul Argenti, a business professor at Dartmouth College in New Hampshire.

For example, in the mid-2000s, fast-food restaurant chain McDonald’s Corporation consulted a U.S. environmental group before it introduced new, environmentally friendly packaging. Agribusiness and financial services company Cargill Inc. worked with a similar group to meet anti-deforestation requirements in Brazil.

John Mahon, a business professor at the University of Maine, compares corporate reputation to a bottle of good wine: “You don’t appreciate it until you taste it.”

In other words, many businesses do well for some time without paying attention to their reputation, Mahon said. But they do not know how much better they could do, if they cared. When a crisis comes, “the lack of investment in reputation may come around and hurt them,” he said.

Businesses range from those that do not put much effort in building their reputations to those that view reputations as a competitive advantage, according to Argenti.

Some research indicates companies with solid reputations can engender conditions that reinforce their reputations: They are more likely to have stronger financial performance, attract and retain good workers, and develop the ability to expand.

For example, Lakshmi Mittal, an expatriate Indian based in London, has turned the obscure Indian company Mittal Steel into ArcelorMittal, a global steelmaking empire, mostly thanks to good corporate reputation. Mittal Steel has acquired assets in different countries based on the owner’s reputation as “a doctor of sick steel mills.” In addition, as reputation is a reflection of trustworthiness, customers and other involved entities tend to be more forgiving of a reputable company when it blunders, according to Mahon.

Conversely, bad reputation can hurt business. Large, publicly traded companies can have any hint of scandal depress their share prices, but small businesses are not exempt from such difficulties, experts say. For example, in 2008, when the owner of Murky Coffee — a popular coffee bar in Arlington, Virginia – engaged in a nasty quarrel with a customer, the customer took his case to the Internet. The coffee bar soon lost some of its luster among local coffee aficionados.

Still, for small and large businesses alike, the exact cost of indifference to reputation or of significant business blunders is difficult to measure, according to Argenti. But clearly a tarnished reputation can lead to negative publicity, decline of share price or market share, loss of revenue, litigation, departure of valued employees or stricter regulation of the industry, he said.

Senior management needs to actively manage reputational risk, according to experts. First of all, that means planning in advance possible responses to challenges, Argenti said.

When a reputational crisis erupts, a company should gather information, communicate quickly with affected entities and, in general, act in a credible and transparent way, he said. Hiding facts, stalling, defending indefensible actions or relying entirely on public relations professionals can make a bad situation worse, experts say.

“You cannot just pretend that you care about your reputation,” said Gaines-Ross of Weber Shandwick. “You have to make it true and genuine because people will find out that you’re not doing what you say you’re doing.”

(This is a product of the Bureau of International Information Programs, U.S. Department of State. )

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