Paul Holmes 15 Jan 1995 // 12:00AM GMT
by Paul A. Holmes
Every decision that an organization must make has four broad sets of implications. The first three are obvious to most managers, factored routinely and formally into the decision-making process, with the senior executives responsible for understanding and analyzing them sitting at the chief executive's right-hand, ready to offer counsel and support that counsel with a knowledge and understanding that comes from years of formal training and study in their fields. These three sets of implications are operational, financial and legal.
The fourth set of implications is generally either ignored, subordinated or included in the process only on the basis of the "gut instinct" of one of the participants, more often than not the chief executive himself, who has many other priorities. If there is someone in the corporate structure with official responsibility for understanding and providing counsel in this arena, he or she is generally not in the upper echelons of the power structure, and very often does not have the same formal qualifications as the chief operations officer, chief financial officer or chief legal officer. This fourth set of implications is reputational.
The reputational implications of a business decision can be defined as those that impact the way in which an organization is regarded by those with whom it interacts, including shareholders, customers and employees, as well as suppliers, government regulators, the media and even competitors. A decision has reputational implications if it has the potential to affect the relationship between the company and any of these groups. In other words, it is difficult to conceive of a decision that does not have reputational implications.
Reputation, most managers today would agree, is an asset (or, if mismanaged, a liability). It certainly is not optional. Every corporation, organization, institution, individual has a reputation. The only option is whether to manage it or allow it to be inferred. If it is to add value, it should be managed with the same care and attention as any asset. It should be obvious that if a decision has four broad sets of implications, and only three are formally and routinely considered, the potential exists for flawed decision making.
As an example, consider the decision that faced the first pharmaceutical company to produce a treatment approved by the Food & Drug Administration for patients infected with the human immunodeficiency virus. How much to charge for the product? Clearly, financial considerations would be best satisfied by charging as much as the market would bear, which in a monopolistic situation was a substantial amount. Operationally and legally, there was no reason not to pursue this course. The reputational considerations, it appears, were either not considered, or the counsel offered was ill-informed.
One month after Burroughs-Welcome set the price for a year's treatment with AZT at $10,000—the most expensive drug of its kind ever: Barron's estimated the company would make $200 million in profits in the first year—company officials were called before a hearing of the House Subcommittee on Health and the Environment to answer charges of price-gouging. A few weeks later, 250 AIDS activists hanged an effigy of the FDA commissioner on Wall Street, and six months later 1,000 consumers showed up to shut down the FDA itself.
Then-president Theodore Haigler revealed just how much consideration the company had given to the reputational implications of its decisions. " I guess we assumed that the drug.... would be paid for in some manner by the patient himself out of his own pocket, or by third party payers. We really didn't get into a lot of that." The company's only communication to AIDS patients in the early stages of the drug's release was through a woman who had been hired to answer telephone calls from people enquiring where they could find the drug.
The short-term consequences of the company's decision were dramatic enough. In the long-term however, Burroughs-Welcome was compelled to bring down the product's price; its senior executives were forced to sit though hours of hostile Congressional questioning; and instead of being given credit for the development of a life-saving treatment, the company was vilified. Ultimately, the controversy over the pricing of AZT changed the way almost all pharmaceutical companies approached the inclusion of patient groups in the clinical trial process and their communication with patients. And it added momentum to calls for reform of the health-care system, and in particular to Congressional scrutiny of the alleged price-gouging by the pharmaceutical industry.
None of these consequences was unpredictable, yet none were predicted.
The most obvious reason is that at Burroughs-Welcome, as at most major corporations, the reputational implications of decisions were not considered with the same weight as the operational, financial and legal implications. But that begs a further, more important question: why are they not considered? Two possibilities suggest themselves: either they are not, generally, as important as the other implications; or they are just as important, but neglected.
To consider the first possibility, certainly it is conceivable that under certain circumstances the reputational implications of a decision may be subordinate to financial or other considerations, but even that is not to say that they should not be considered and factored into the process. However, there is mounting evidence that as a general rule reputational implications are important to sustained corporate success. The scrutiny under which business operates today, the amount of information in the hands of consumers and other publics, and a trend towards increasing commoditization of products, make reputation a vital asset, and in some industries the most important asset a corporation possesses.
If reputation has been neglected, it is not difficult to see the reasons why. The first has to do with the short-term, market-focused mentality of most managers; the second has to do with the failure of those individuals currently closest to managing reputation to demonstrate the value of what they do, or even to hold themselves to meaningful standards of accountability.
To a large extent, the art of management is the art of reconciling dilemmas, and two dilemmas dominate: the trade-off between short-term profits and long-term investment; and the need to balance the expectations of various corporate stakeholders, including employees, consumers and shareholders.
Typically, these two dilemmas have been reconciled in favor of short-term profits and the primacy of the shareholder over other constituent groups. Reputation management, a discipline that is primarily about the long-term (since the pay-off from investment in corporate reputation tends to be an investment that pays off over the lifetime of the organization) and about balancing the needs of all the various stakeholder groups, has thus often been viewed as irrelevant.
However, there is reason to believe that shareholders themselves, blamed in the past for the quarter-to-quarter focus of American business, will increasingly demand that companies take a longer term view, and that successful companies will be those that find a more equitable balance between investors, employees and consumers. And there is mounting evidence that contrary to business school doctrine, maximizing shareholder wealth and profit maximization are not the dominant driving force or primary objective of the most successful companies.
Harvard economist Michael Porter, in The Competitive Advantage of Nations, conceives of capitalist nations passing through several sequential stages of development: factor driven, investment driven, innovation driven, and wealth or money driven. Japan and Germany, Porter says, are innovation driven; Sweden is not really succeeding in innovation and is falling back on investment driven; the U.S. and the U.K. are into the wealth driven zone.
"The wealth driven stage, if it occurs, will eventually lead to slow decline in economic prosperity. It may be decades before aggregate data reflect the underlying loss of competitive advantage.... In fact, in the transition from innovation to wealth driven, company profitability and the standard of living may still be rising, as companies harvest (underinvest in) market positions, and as managers and employees obtain wage increases that begin moving ahead of productivity improvements."
Porter hints at several reasons for the decline experienced by wealth-driven economies: money orientation is uninspiring to both managers and employees, and tends to propel executives trained in accounting or law to the top of the corporation, ahead of those trained in technology and marketing; it also precludes companies from investing long-term in human and technological resources.
Management consultant and author Peter Drucker predicts a change, however. In his 1991 essay The Governance of Corporations, he traces the growth of pension fund ownership of American corporations. In the early days of their rise to pre-eminence, Drucker says, pension funds did not wish to be owners; they wished to be passive investors, and short-term investors at that. Today, however, “the trustees of pension funds, especially those representing public employees, are waking up to the fact that they are no longer investors in shares. An investor, by definition, can sell his holdings. The holdings of even a midsize pension fund are already so large that they are not easily sold. Or, more precisely, these holdings can, as a rule, be sold only if another pension fund buys them. They are much too large to be easily absorbed by the market and are thus permanently part of the circular trading among institutions."
The difficulty that large institutional holders have in trading their shares, Drucker argues, means that they have to take an "ownership" interest in the companies in which they invest, a trend that has become apparent over the past three or four years as institutions play an increasingly active role in the management of companies they own, particularly those perceived to be underperforming. Moreover, that involvement has moved beyond pressure for short term returns to pressure for sustained managerial excellence, as evidenced by the announcement that the largest of the pension funds, the California Public Employees Retirement Fund (CalPERs) will now take into account the relationship between management and employees when evaluating investment decisions, a recognition that this relationship is essential to longterm performance.
"Short-term capital gains are of no benefit to shareholders who cannot sell," Drucker points out. "The interest of a large pension fund is in the value of a holding at the time at which a beneficiary turns from being an employee who pays into the fund into a pensioner who gets paid by the fund. This means that the time over which a fund invests—the time until its future beneficiaries will retire—is on average 15 years rather than three months or six months. This is the appropriate return horizon for these owners."
At the same time, there is a mounting body of research indicating that companies driven by wealth creation may actually underperform those with a broader range of objectives and a commitment to balancing the needs of multiple stakeholders: employees and customers as well as shareholders.
Management consultant James Collins and Stanford University professor Jerry Porras, for their new book Built to Last, researched 18 "visionary" companies, including 3M, General Electric, HewlettPackard, Johnson & Johnson, Merck, Philip Morris, Wal-Mart and Walt Disney, which provided a rate of return on investment 16 times greater than the stock market average over the past 70 years. They compared these companies to 18 others, founded in the same era, operating in the same industry, and also successful, providing a return on investment three times that of the market over the same period.
"Visionary companies pursue a cluster of objectives, of which making money is only one, and not necessarily the most important one," the authors conclude. "They're guided by a core ideology—core values and sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the purely profit-driven comparison companies."
This finding is synchronous with research conducted by Harvard Business School professors John Kotter and James Heskett in their 1992 book Corporate Culture and Performance. The authors found that firms with cultures that emphasized three key managerial constituencies—customers, employees and stockholders—outperformed those firms that emphasized only one or two of these constituencies. Over an eleven-year period, the former increased revenues by an average of 682% versus 166% for the latter; expanded their workforces by 282% versus 36%; and grew their stock prices by 901% versus 74%.
"Only when managers care about the legitimate interests of stockholders do they strive to perform well economically over time," say Kotter and Heskett. " And in a competitive industry that is only possible when they take care of their customers, and in a competitive labor market that is only possible when they take care of those who serve customers—employees."
The authors add that at high-performing companies (their sample included Anheuser-Busch, Dayton-Hudson, Hewlett-Packard, Shell and Wal-Mart) there was a value system that communicated the importance of serving all three constituencies to all employees, and that "fairness to all was a standard feature—a commitment often described as an emphasis on 'integrity' or `doing the right thing."'
One example in the work of Collins and Porras compares Merck to competitor Pfizer. It cites the former's decision to make the river blindness drug Mectizan free of charge after it was found that the people who needed it were unable to pay. Then chief executive P. Roy Vagelos justified the decision in two ways: a failure to go forward would have demoralized company scientists working for a company that viewed itself as being "in the business of preserving and improving human life. For the rest of my life, that hotel will be the 10-buck, red-key hotel. I will never forgive them. And if they've rescinded the policy? Who cares? Perceptions like this one are immune to mere facts or the passage of time."
oreover, the "moments of truth" that Carlzon talks about include not only personal experiences but also stories that appear in the media, the comments of friends, the criticisms of the activist community. Any information that people consider credible contributes to their perceptions of the institutions with which they interact.
Traditionally, these issues might have been seen as marketing issues, but their complexity is such that marketing, at least as it has been defined historically, is ill equipped to deal with them, because marketing's single-minded focus on the consumer is as short-sighted as senior management's single-minded focus on the shareholder.
Philip Kotler, professor of marketing at Northwestern University's Kellogg School of Management and author of Marketing Management, one of the seminal texts on the subject, defines marketing as: "the task of (1) selecting attractive target markets; (2) designing customer-oriented products and services; and (3) developing effective distribution and communication programs with the aim of producing high consumer purchase and satisfaction and high company attainment of its objectives."
Marketing, thus defined, has two shortcomings: its focus on a single audience and its focus on a single transaction.
Reputation management, a more holistic philosophy, considers the company's relationship with consumers within the context of a range of relationships, any of which may, in specific instances, supercede the relationship with consumers in priority. Moreover, it considers the impact of all of the company's activities—from the sourcing of materials and choice of suppliers to production processes and transportation and disposal of waste materials—on those relationships, rather than focusing entirely on the brief interface between company and consumer.
Indeed, reputation management must go beyond the traditional parameters of marketing, public relations and communications. It must be, first and foremost, a behavioral discipline, in two senses: first of all, it must be rooted in the behavior of the organization—what it does as well as what it says; secondly, it must have as its objective changing the behavior of stakeholder groups.
There are two stages to the reputation management process: the first is earning a reputation, something that is accomplished by managing the messages an organization sends through its behavior and its direct and indirect communications; the second is leveraging that reputation so that it provides a tangible business benefit. Reputation is not an end in itself, but a means to an end.
In the past, this has not been the case. Most attempts to influence corporate image have been communications-based. Corporate managements have apparently believed that if they say, for example, that they are environmentally-friendly, the public will somehow forget that they are responsible for millions of tons of pollution every year; or if they tell employees that people are the company's most valuable resource, those employees will see no inconsistency when 20,000 of them are let go to appease the financial community. In this context, it is not surprising that the reputation of business as an institution leaves a great deal to be desired, and that business has a hard time winning public support for its agenda, even when that agenda has major societal benefits.
Communication must be consistent with behavior. Where it is not, behavior will inevitably have greater credibility. (Of course, action without communication is equally unhelpful: organizations must not only behave in a way that emphasizes reputation, they must also ensure that stakeholders recognize and understand their actions.)
One factor that clearly impacts reputation—and will be more important to reputation in the future—is quality. Reputation managers must have a role not only in communicating the company's commitment to quality, but in helping to define what quality means to consumers, in ensuring that employees understand the importance of quality (not to management, but to their own job security), in communicating to shareholders why the company is investing in quality, and in monitoring the extent to which the company is meeting the expectations of all three stakeholder audiences in implementing quality programs.
In such an environment, the chief reputation officer has four primary areas of responsibility:
• to provide counsel to the chief executive officer and other senior management personnel on the reputational impact of their decisions;
• to communicate within the organization to all employees that their day to day actions must incorporate reputational thinking, so that employees who interact with consumers, communities and other employees do not act in such a way that they undermine the organization's relationships with those groups;
• to communicate internally with employees and externally with consumers, communities and shareholders to ensure that they fully understand the company's position on issues that affect them; and
• to find ways to leverage the reputation of the organization so that stakeholders become active in helping management achieve its objectives, and at least that they do not obstruct management in the achieving of those objectives.
The first responsibility demands that the chief reputation officer be part of the highest level of company management. In fact, if one accepts the premise that all decisions have operational, financial, legal and reputational implications, and that all are important, she or he must be at a level equivalent to that of the chief operations officer, the chief financial officer or the chief legal counsel.
It also demands that she or he be a skilled applied social scientist. Counsel must be based on experience, research and precedent, not on gut instinct or on some ill-defined notion that the reputation manager is the "conscience of the corporation." It will be useful only in as much as it is successful in predicting the reactions and behaviors of constituent groups and influencing those reactions and behaviors.
The second responsibility demands that the chief reputation officer develop a strong understanding of the corporate culture and how it works, that she or he understand the impact upon employees of not only the formal lines of management communication but also the informal networks of information that exist within all organizations, and the powerful communications value of management recognition programs and compensation structures. It also demands that she or he have some input into all of the decisions that impact employees.
The third responsibility demands that the reputation management function be consolidated in a single office, not dispersed as it all too often is so that the individual responsible for relationships with consumers (marketing) functions in isolation from the individual who manages the relationship with employees (human resources or employee communications) who in turn has little contact with the individual accountable for the relationship with shareholders (investor relations). In today's world, all these audiences interact, the perceptions of one influencing the perceptions of another.
At the very least marketing, public relations, government relations, investor relations, community relations and employee communications are part of the reputation management function. One could also make a good case that corporate ethics, human resources, environmental management and quality functions should have at least a dotted-line reporting relationship with the reputation management function.
Finally, the fourth responsibility demands that the chief reputation officer be accountable not merely in terms of how stakeholders regard the organization, but more importantly in terms of how successful the organization is in leveraging its reputation to achieve measurable, meaningful bottom line results.
Reputation management is redundant if it is only about making the company well liked, even respected. There is not a company in America (one hopes) that has as one of its strategic objectives to be popular, or to have nice things written about it in the press, and reputation management must be exclusively about helping companies achieve their strategic objectives.
In other words, reputation management is not about making employees happier in their work, it is about leveraging their happiness to make them more productive, more loyal and more valuable contributors; it is not about making consumers feel good about a product, it is about converting those good feelings to increased sales; it is not about helping shareholders understand corporate policy but ensuring that understanding results in a higher share price.
And it is about avoiding decisions that will inflict reputational damage upon an organization and make achieving all of these objectives more difficult.
If reputation managers can demonstrate their ability to identify issues that have the ability to impact corporate reputation, find creative ways to maximize the value of reputation and minimize reputation erosion, and then harness the power of reputation to achieve meaningful business success, they will earn a place in the executive suite alongside the CFO, COO and corporate counsel.
And if they do that, they can ensure that corporate decisions are taken in an environment that takes into consideration all of their potential implications.
The benefits for both business and the society in which it operates should be obvious.
Article tagsPR Management