What financial value is in a company’s reputation? A lot.

Tuesday, 26 February 2019

In an article published by The Sunday Business Post (24 February 2019), ByrneWallace’s reputation management partner, Mark O’Shaughnessy, discusses the importance of proactive planning when managing a company’s reputation. He outlines the main threats which can typically impact upon an organisation’s reputation and key steps which, when taken, can mitigate against their potential impact.  And should a crisis arise, Mark provides practical tips on what to do, drawing upon lessons learnt from recent experience.

What financial value is in a company’s reputation?  A lot.

Every child grows up being told that sticks and stones can break your bones but names will never hurt you. If you grow up to be responsible for a company that sells directly to the public, operates in a highly regulated industry or is publically traded, this adage does not hold true. In fact, your company’s reputation and name are its most valuable asset.
  
Recent studies indicate that over 40% of the value of the businesses listed on the FTSE 100 is attributable to their reputations. In essence, this is the value the market or a competitor places on your business which is over and above its valuation derived from traditional financial measurements such as net asset values and dividends paid.

It is this value that companies need to closely protect. Companies cannot eliminate all external threats, and certain threats just arise due to the nature of the business. However, companies can and should consider these threats in advance, and then plan how to respond should they arise.

Fail to prepare, prepare to fail

The potential threats to a company’s reputation include product recalls, marketing mishaps, accounting irregularities, competitor attacks, hostile leavers and adverse media intrusion. 

In today’s world of 24/7 news reporting and the proliferation of social media platforms providing everyone and anyone with an opportunity to comment, it is important that a company can respond quickly and effectively. Advance preparation is key. 

It is difficult, if not impossible, to predict every particular threat that a company may face. However, it is possible for a company to consider its most likely threats and plan for those. If something that was unplanned then happens to occur, a company will have the broad framework in place to act quickly and effectively. Preparation includes assigning responsibility to a dedicated lead from the executive management team as well as ensuring out of hours support from core departments such as finance and IT.
 
It is also important that a company has built relationships with external advisors such as legal and PR that can assist in guiding a company through the crucial initial 48-hour period.
  
Engaging with external lawyers has the added benefit of providing the company with the ability to maintain legal privilege over documentation created during this period.  This is particularly helpful in the event of any subsequent regulatory investigation.

What and when to do it?

The initial response from the company is critical and will define the narrative.  Sometimes saying nothing is the correct approach but this needs to be a conscious decision having conducted a risk assessment by analysing all immediate options and their consequences.
  
Typically an active approach is often the most tactically advantageous. This can sometimes mean engaging openly and transparently with the media.  On other occasions it may involve engaging with your main suppliers in order to provide them with assurance. The form and tone of this communication is crucial. A call from your CEO to the main contact of your customer explaining the issue may provide sufficient comfort to get you through this initial period of turmoil and keep the income stream alive.

United Airlines lost $1BN off its share value in 2018 due to the manner in which it handled the social media furore arising from the forceful ejection of a passenger from its plane.  This is in contrast to Samsung which bounced back positively from its world-wide product recall of the Galaxy Note and managed to increase its shareholder value by 20% within 12 months; largely due to its effective reputation management plan.

Engaging quickly and appropriately with the market is the usual first step. However, it is important that this initial response is proportionate and moderate.  Facts will emerge as the issue develops and it is important that a company does not give the market a false or misleading message. This will be counterproductive and can irreparably damage a company’s reputation and consumer's trust in its products or services.
  
If all the facts are not known, it is best to state that and indicate that the company is working with the relevant regulatory bodies, or has commissioned an independent investigation, and will provide an update as soon as possible. The added benefit of this approach is that it buys the company some time to get a handle on the factual issues; particularly beneficial if the issues relate to complex manufacturing processes or accountancy practices.

The next chapter…

A company’s next move will be dependent on the threat encountered. The response of a company that has been defamed publicly by a competitor will be very different from that of a company that has identified a problem in its supply chain necessitating a national product recall. The former is likely to go on the offensive looking to regain market share and may issue legal proceedings seeking to recover damages and secure a public apology.  The latter may seek to refocus efforts on improving its manufacturing processes and engaging in a comprehensive Corporate Social Responsibility programme.

How your company responds to these threats will define its future. Advance planning won’t stop the threats but it will ensure your company is protected and can shape its own narrative.

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