Strong Response To Reputational Risks Is A Competitive Advantage

Companies need not only to do the right thing, they need to differentiate themselves from their peers if they are to stand out from the crowd when reputational crises hit.

reuptationalWhen Dick’s Sporting Goods announced that it would no longer sell assault weapons in its stores, or any firearms to customers under the age of 21, it became the latest example of a company recognizing the tangible, measurable value of its reputation – and of moving rapidly to create a narrative that set itself apart from the competition. It has already been rewarded by the relatively strong performance of its stock and will continue to see benefits over time in terms of its enhanced relationship with stakeholders – including customers.

The same could be said of Merck & Co. CEO Ken Frazier’s rapid response last August to President Trump’s comments in the aftermath of the white supremacist rally in Charlottesville. Frazier was the first CEO to announce, only two days after the incident, that he was resigning from the president’s Economic Advisory Council. Others followed, some after lengthy consideration, but Merck’s fast response created tangible value, as its stock outperformed the industry average in the weeks that followed, adding billions of dollars in market cap.

It would be easy to attribute moves like these to good corporate culture or CEOs with good instincts for where their customers are, but the speed with which they acted suggests a corporate process that allows for rapid analysis, decision-making and internal and external communications, driven by an understanding of the value of reputation-based decisions.

“No matter how well a company plans, unanticipated risks can emerge suddenly as culture shifts alter stakeholder expectations in dramatic ways.”

Research by my firm, Steel City Re, shows that the cost of reputational attacks against companies has risen by more than 500% over the past six years, fueled by an angry public, weaponized social media and influencers, including politicians, who are adept at channeling that anger toward specific targets.

At the same time, we’ve seen the RepuSPX index, an equity index of companies that have employed the governance tools necessary to maintain strong and resilient reputations and favorably surprise the equity markets, outperform the S&P by 375% over the past 15 years.

In the days following the Dick’s Sporting Goods announcement, its stock outperformed the S&P Retail Index by about 2%. In the month following Ken Frazier’s announcement, Merck outperformed the S&P 500 Pharmaceutical Index by about 2%.

Clearly, while the desire to do the right and ethical thing is a good motive in and of itself, being perceived as a first-mover and leader, especially when major cultural shifts and societal events threaten an entire industry, also yields very real and tangible financial benefits. To realize those benefits, companies need to demonstrate through their actions that whatever may happen elsewhere in their industry or in society in general, they are living up to the expectations their stakeholders have for them.

We live in an age where those expectations can change in what feels like an instant. A short time ago, the top reputation risk was allegations of unethical and inappropriate executive behavior that gained prominence through #MeToo. At this particular moment, it is gun violence. No matter how well a company plans, unanticipated risks can emerge suddenly as culture shifts alter stakeholder expectations in dramatic ways. Companies that are not equipped to deal with those risks will ultimately pay the price.

Reputation risk, to sum it up simply, is the risk of harmful economic actions by angry or disappointed stakeholders. It is different than the types of risk corporate America is used to dealing with. In the court of public opinion, there is no time for preparation, no rules of evidence, no discovery process and no objective and final decider of fact.

While this risk has always existed, today its impact can cause damage at speeds we’ve never seen before. Social media can cause a cascade of events in rapid fire succession.  Organized groups or even individuals can create fake identities or use “bots” to spread information – accurate or inaccurate – rapidly and widely. Activist investors smell blood and apply pressure. Employees, customers and business partners assume the worst. Sales fall, margins narrow, retention and recruitment of staff becomes an issue. The narrative, true or false, quickly becomes etched in people’s minds, regardless of the facts that ultimately come to light.

That’s why smart companies are building defenses in advance – first developing the internal systems that allow for rapid analysis, communication and decision-making, then signaling through third party warranties like insurance products that they are in the strongest position possible. It can take months to develop these simple, credible and convincing defenses, but once in place, they will deter attacks as well as mitigate damage and enable faster recovery afterwards. And for the companies that are the first out of the gate with an authentic strategy, their stakeholders will appreciate and reward them.

Clearly, companies like Dick’s and Merck had systems like these in place, enabling them to stand out from their peers with their rapid response and positioning as industry leaders.  They didn’t start thinking about it when their issues arose. They understood that the economic damage from the sudden emergence of reputation risk can be as great as the damage from a sudden tornado – and that they needed to build their defenses proactively, just as one builds defenses for tornados if one lives in “tornado” country.

Companies need not only to do the right thing, they need to differentiate themselves from their peers if they are to stand out from the crowd when reputational crises hit. In today’s environment, survival of the fittest requires not only fitness, but a recognition of that fitness by stakeholders.

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