Reputation Capital: Building and Maintaining Trust in the 21st Century

Barack Obama staked his reputation on delivering against a wide range of different concerns – climate change, universal healthcare, reform of the financial markets. The risk was great – but so was the return: he now sits in the Oval Office as one of the world’s most powerful men. The management anthology Reputation Capital: Building and Maintaining Trust in the 21st Century provides some context for President Obama’s success. The main idea set out in the publication, which brings together perspectives from some 30 international authors, is that – as with investment strategies – when it comes to building reputation, there is a relationship between return and risk. Click on one of the bullet points below or scroll down to find out more on this topic.

Barack Obama staked his reputation on delivering against a wide range of different concerns – climate change, universal healthcare, reform of the financial markets. The risk was great – but so was the return: he now sits in the Oval Office as one of the world’s most powerful men. The management anthology Reputation Capital: Building and Maintaining Trust in the 21st Century provides some context for President Obama’s success. The main idea set out in the publication, which brings together perspectives from some 30 international authors, is that – as with investment strategies – when it comes to building reputation, there is a relationship between return and risk.

 

The international economic crisis has put a great deal of strain on the trust between companies and their customers. This precarious economic situation has taken a toll on company accounts, but has had a strong impact upon their reputations. Reputation is among the five most important intangible corporate assets, together with customer and employee satisfaction, brand and corporate culture – according to the results of a recent study by Harvard Business Manager.

 

In light of this, certain questions have become more relevant than ever: Which strategies can a company use to re-establish its reputation? And how can a good name be safeguarded in the long-term? The authors of the new management anthology Reputation Capital: Building and Maintaining Trust in the 21st Century provides some initial responses to these questions and critically evaluates conventional approaches to reputation.

True Beauty Comes From Within

In their analysis, entitled "The CSR myth: true beauty comes from within", Matthias Vonwil and Robert Wreschniok reach a surprising conclusion: it is not CSR activities that give a company a good name, but, more importantly, reliable and reputable corporate communications. These findings are backed up by recent studies by the European Centre for Reputation Studies (ECRS). They show that 80 to 90 percent of stakeholder evaluations of a company are determined by economic, and not social, factors.

 

Performance Decisive for a Good Reputation
The extent to which a solid reputation affects the financial performance of DAX 30 companies has been investigated by Manfred Schwaiger and his team at the Ludwig-Maximilians-University Munich. Since 2005, he and his team of specialists have carried out comprehensive stakeholder surveys. The model they developed for their analysis is much more precise than previous reputational metrics and also takes account of emotional components. The conclusion the 25 companies with the best reputation outperform other companies by a long way.

"Companies can invest in machines – but also in reputation", says Joachim Klewes, communications specialist and, together with Robert Wreschniok, co-editor of the management compendium. When developing a strategy, Klewes and Wreschniok find it helpful to draw an analogy with the financial market. "As with investment strategies, when it comes to building up reputation, there is a certain relationship between return and risk."

 

 

Companies are increasingly investing in Corporate Social Responsibility (CSR). Their aim is to strengthen corporate reputation and to safeguard it in the long term. But how effective are such measures? Are the high costs justified? Matthias Vonwil and Robert Wreschniok have their doubts.

 

A recent study by the European Centre for Reputation Studies (ECRS) shows that between 80 and 90 percent of a company’s reputation is determined by economic aspects and not by the company’s engagement with society. Most importantly, reliable and reputable corporate communications are the foundation for a solid reputation. The effect of other CSR activities, by contrast, is much smaller than expected.

 

In the worst case, CSR can even lead to additional reputational risks. For, as soon as communicative measures aimed at boosting social reputation are exposed as pure marketing devices, they lose their credibility and the organisation its authenticity.

 

Still, CSR represents a massive opportunity for every company. For example, CSR is often the best response to challenges within a company, such as fostering teamwork, inter-departmental communication and identification with the company. But for this, companies need to change their approach to CSR. Instead of asking: "Where could we usefully get involved?", the first question should be: "What problems are there within our company that could be effectively addressed with CSR measures?"

 

CSR, understood this way, is not primarily directed towards the public, but towards the company’s own employees. They are the most important stakeholders in any company and the decisive lever for successful CSR. 

 

Numerous scientific studies have found a positive correlation between a good corporate reputation and such business objectives as customer or employee loyalty. But how does a solid reputation affect a company’s financial performance on the stock market? A team lead by Professor Schwaiger at the Institute of Market-based Management (IMM) at the Ludwig-Maximilians-University Munich presents its latest research results.

 

The comprehensive study by the IMM compared the reputation and stock-market performance of 60 blue-chip companies. The findings: the 25 percent of companies with the best reputation (Top25) considerably outperformed the companies with a poorer reputation. And compared to price movements on the DAX 30 in general, the Top25 return greater yield with lower risk.

 

The effect of a good reputation on the recruiting market is equally clear: companies with a good reputation are much more sought-after than comparable companies with a poorer reputation. In the contest for 'high potentials', this means that companies with lesser reputations need to pay salaries of up to 19 percent higher in order to win over graduates.

 

The methods for measuring reputation used in the study are based on a custom-designed model. Reputation indices and reputation drivers are measured here much more precisely than in previous designs. For example, in this model, the emotional component also plays a central role in evaluating a company.

  

 

 

 

Joachim Klewes: Now so more than ever. Over the course of our recent financial or economic crisis, many companies have lost the confidence of their stakeholders and must now try to painstakingly renew that trust. The crisis itself has shown how reputation is increasingly becoming a decisive competitive factor. To name just three examples: a company with a solid reputation can, firstly, more easily create loyalty among high potentials and, secondly, expect less regulatory control. Finally, investors also have more confidence, for example, when it comes to injecting capital.

 

Robert Wreschniok: A recent study by Harvard Business Manager places reputation among the five most important intangible corporate assets, together with customer satisfaction, employee satisfaction, brand and corporate culture – well ahead of patents and licenses.

 

R.W.: Certainly not by then investing more in CSR activities whilst merely affecting remorse. Corporate reputation consists of three dimensions. The first and most important dimension is indeed economic reputation. Here, it is a question of meeting expectations with respect to economic performance. 80 percent of public judgements about a company are determined by this. The second dimension is societal reputation. However, only 20 percent of public judgements relate to societal questions. For this reason, corporate communications that is matter-of-fact, sincere and reliable is often the best means of regaining stakeholder trust.

 

 

J.K.: That is expressive reputation, which reflects the extent to which a company succeeds in establishing a unique identity, setting itself apart from its competitors. Management must continuously perform a balancing act: on the one hand, the expectations of the most important stakeholders must be met – and on the other hand, it must always break with those expectations in order to distinguish itself from other companies. 

 

 

J.K.: The principles for successfully building up capital, both financial and reputational, are similar. On the financial market – as with the opinion market – communication and psychology play an increasingly important role. Second, our analogy with the financial market helps us express complex relationships concisely.

 

R. W.: For example, everyone associates the term ‘hedge strategy’ with a highly speculative investment style that promises high returns, but also carries high risks. A value strategy, on the other hand, stands for sustainable investment. Growth strategies promise controlled growth, while total return aims for absolute security – everything you invest, you get back. And, just as no one any longer believes in total return on the stock exchange, we too are critical of total return strategies in reputation management.

 

 

J.K.: Analogies reduce complexity. They help us perceive problems from different perspectives. That helps a great deal when making decisions and solving problems. The analogy with investment strategies, for example, highlights the idea that every reputation strategy involves choosing a particular risk-return ratio – that is, one must weigh up reputational opportunities and risks. 

 

R.W.: The more aggressive a company’s communications strategy, the greater the expectations it creates and the greater the reputation risk it necessarily assumes. Examples are corporations or people, who in terms of our analogy have chosen a hedge-fund strategy for building up their reputation. One example that has received special attention internationally is the Obama campaign. Here we have extreme success, extremely high expectations – and an extremely high risk of folding if these expectations are disappointed. A certainly somewhat unintended result of this hedge strategy in this case is the award of the Nobel Peace Prize to Barack Obama. It’s hard to imagine greater trust in advance. 

 

J.K.: At the other end of the scale, we have companies who follow a total-return strategy. They consistently attempt to avoid publicity. One can find examples in the B-to-B sector especially. Interestingly, the reputation risk here is particularly high, despite this restraint. Total return strategies today are compatible with neither the scandal dynamics of the global media system nor the new spheres of influence emerging in Web 2.0. Companies that have in the past failed to firmly establish a clear and trusted profile among their stakeholders, will in future more easily become a football for media interests and opinion forums in the internet.

 

 

J.K.: No, there are specific reputation risks and opportunities for every company. Before you decide on a particular reputation strategy, you should evaluate the internal and external conditions for your company. Let me demonstrate this using Siemens as an example: when the corruption affair was uncovered in 2006, it created a massive reputation problem for Siemens. This could not be fixed through communications alone. Consequently, Siemens decisively opted for a value strategy and began to change corporate structures and employee behaviours. This process was accompanied by internal audits, and a process for changing corporate culture and values.

 

R.W.: Only when Siemens began to be perceived as a leader in the fight against corruption did the company increasingly use external communications activities. Through the Siemens Answer Programme, Siemens has actively positioned itself since mid-2008 on certain pre-defined global megatrends, such as demographic change, urbanisation and climate change. In this way, it has been building up its opinion leadership on issues relevant to business. In stock-market jargon we would say: Siemens is now increasingly pursuing a reputational growth strategy.

 

 

Review: ECRS Symposium, "Reputation Capital"  

by Kristin Köhler (www.communicationcontrolling.de)  

 

The European Centre for Reputation Studies (ECRS) organized for the fouth time an international symposium on reputation studies on Nov. 13, 2009 .

 

Starting with an academic controversy, Mark Eisenegger, co-head of the Research Institute for the Public Sphere and Society (fög) at the University of Zurich, and Jonathan Silberstein-Loeb, research fellow at the Oxford University Centre for Corporate Reputation, debated in the morning session about the meaning of reputation and the importance of communication in establishing reputation.

 

Reputation would not just be communication, but sustainable long-term action of an organisation, so Eisenegger. He identifies three reputation dimensions of companies:

Trust and reputation are close related to each other when it comes to reputation management: Reputation creates trust and trust presupposes that expectations are met. The expectations again occur in the three dimensions. Businesses better meet their stakeholders’ expectations to perform well, so his conclusion So far, so good, but how could reputation be managed at all? The current financial crisis shows a great loss of trust and corporate reputation, especially in the financial markets. To retain their scope of action, Eisenegger stated that companies could not reduce their reputation management to mere communication – however corporate realities must in any case be changed. The communicative environment and deficient perceptions would have been the cause of the past reputation problem, but the academic does not see communications to regain trust through honest, meaningful communication about a company’s real situation: On the one hand, communication could prove value when an enterprise is undervalued. But markets’ overvaluation could not be solved with expectation management - corporate reality must be changed in this case, so Eisenegger's conclusion. Being together with communication professionals his statement earned some critics from the participants being confident that strategic stakeholder management, issues tracking, measurement and a dialogic approach of communication could help regain reputation at all.

 

Silberstein-Loeb opened his speech with a different approach to the concept of reputation: the reputation of a company would be determined by testimonial belief and not stakeholders’ recognition of trustworthiness as it is Eisenegger’s academically opinion. His fundamental question: How does information moves into the market? So Silberstein-Loeb showed just one aspect of what influences reputation and what could be managed by communications: the perception of the media (as an opinion leader). The communicators could not influence stock prices and hard facts, the other reputational bases, so the research fellow from the Oxford University. Therefore, he does not understand Eisenegger’s three reputation dimensions. For Silberstein-Loeb, reputation is based on information; social norms and values are also reflected in a organisation’s reputation but are not really a matter of interest: reputation is not important for enlightened self-interest but to make money! In a world of solely commercial transactions reputation would not be necessary, but in reality all markets consist of social interactions. So reputation could facilitate market function and could be seen as a company’s social capital. But not in the same as Eisenegger’s meaning: a good reputation could limit a company strategically (e.g. Google’s market entry in China), so a good unreliable reputation could be as good as a good reliable reputation – it all has to do with what serves the company best. So for Silberstein-Loeb a company could have a good reputation also when its business model isn’t sustainable. Eisenegger stated that for a good reputation reality must come first: there would be no good reputation without a sustainable business model. So change management always comes before communication management.

 

The two perspectives provoked a lot of discussions among the audience as one could imagine. The next sessions have been less controversial giving more practical insights in the field of reputation risk measurment and issues management.

 

Next, Frank Herkenhoff, head of media relations at Deutsche Börse, introduced his insights in reputation risk management. In his approach, he adapts risk management as a standard procedure in businesses to the corporate communications function. In general, risk management is in place to optimize the risk/return profile in business areas. A risk matrix could serve as a holistic instrument to identify upside and downside risks. The same approach could be used in reputation risk management. His matrix for corporate communications consists of two dimensions:

So you could identify four different types of risk for corporate communications. The causes of reputational risks lie not in the events themselves, but in the attentive structures of the mass media. So Herkenhoff tried to measure the possibility of events becoming news based on social sciences' framing and news value-theory. For identifying the risk potential two questions must be answered:

The methodology for recording the probability of publication is arranged by him into four steps:

In the end, the responsible for media relations has a reputation risk matrix on hand in which the risks are arranged as a risk portfolio in terms of likelihood of occurring and damage/benefit. In a next step, a strategy based on the risk management measures could be selected – according to traditional risk management risk diversification, avoidance, education, transfer, provisioning, or intensification.

 

Jan Müller, Vice President of Issues and Strategy in the Corporate Communications department of EADS, presented his company's issues management system. Issues occur in two spheres of action, the company itself and its environment. Assessing the perception of the company by its stakeholders through opinion polling should identify tensions between expectations of stakeholders and the performance/behaviour of the company. Strengths and weaknesses could be seen and integrated in the communication strategy. The second dimension of the issues management process is the company’s environment. EADS tries to identify changes in corporate environment and their potential impacts on the top and bottom line. The key issues are gathered in four empirical steps:

The quantitative input consists of thousands of articles from 57 international newspapers in eleven categories on a monthly basis. The qualitative input comes from an open media set, is content driven and looks for “future signals”. The internal risk and opportunity survey includes the top management, enterprise risk management and opportunity thinkers; the external participants have to have an university degree, an annual income from + € 50,000 and an interest in politics and economy. The result of the elaborate analysis is a quarterly "Trend & Issue Analysis Brief" sent to companies “Top 50” including the key findings, an issue navigator, and the main analysis with five to seven elaborated topics. The in-depth analysis feeds the communications’ actions afterwards, but serves as a strategic business tool for the whole management as well – following Eisenegger’s understanding from a sustainable and broad reputation management approach.

 

Following this, communication managers from industry-leading companies shared case studies, including brand- and reputation-building campaigns by Coca-Cola Hellenic (presented by Jens Rupp, Sustainability Manager), insights from The Dow Chemical Company's reputation initiative "The Human Element" (presented by David B. Rockland, Ketchum) and Siemens AG (presented by Stefan Denig, responsible for Siemens’ issues management). In the last presentation of the day, Georg Kolb from Pleon’s social media unit showed the growing importance of social media networks and online communities for reputation management and the risks occurring from within. Social media monitoring has to be in integral part of issues management as well - the same also Müller explained in the EADS case. The analysis of the web 2.0 environments is crucial to identify new stakeholders and channels, current discussions or potential future topics of the company. So social media could be the best place to manage smaller pieces of the opinion market and with it improving reputation managment, reckoned Kolb.

 

In the closing workshop, participants were asked to choose a convenient reputation strategy for a specific company in a case study. The ECRS identifies four reputation strategies that could drive up a company’s reputation capital when fitting to the overall strategy and business model: