VIEWPOINT
  • Governance

The Art of Managing Reputational Risk

A company’s reputation is the most valuable asset that a company possesses, and yet, Tuck's Professor Paul Argenti says, many companies put their reputations at risk through activities or communications that don’t align with their stated values.



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Why would a company’s executives make a strategic decision that they know will cost the company a staggering $2 billion in annual sales? Ask CVS. The drugstore giant recently announced that it will forego approximately $2 billion in sales of tobacco and tobacco-related products. The reason, according to CEO Larry J. Merlo: “We came to the decision that providing health care and selling cigarettes just don’t go together in the same setting.”

Paul Argenti is professor of Corporate Communications at Tuck School of Business at Dartmouth, where he serves as faculty director for Tuck's Leadership and Strategic Impact program and Novartis's executive program. Prior to arriving at Tuck in 1981 he taught management and corporate communication at the Harvard Business School, Columbia Business School. He has also taught as a visiting professor at the International University of Japan, the Helsinki School of Economics, Erasmus University in the Netherlands, London Business School, Università della Svizzera Italiana and Singapore Management University.

Argenti is a Fulbright Scholar and won the Pathfinder Award in 2007 from the Institute for Public Relations for the excellence of his research. His latest book 'Digital Strategies for Powerful Corporate Communications' was published in 2009.

The move by CVS, says professor Paul Argenti of Dartmouth’s Tuck School of Business, shows that the company recognized what he calls the “reputational risk” of selling tobacco products. A company’s reputation is the most valuable asset that a company possesses, and yet, Argenti says, many companies put their reputations at risk through activities or communications that don’t align with their stated values. Companies need to mean what they say and say what they mean, he says. They need to be authentic. Socrates described authenticity best when he wrote, “Desire to be what you endeavor to appear.” Trust in business is at an all-time low because many companies are not what they endeavor to appear. CVS built its brand on the core value of promoting health care to its customers, yet was selling tobacco in direct contradiction to this core value. CVS took a major step in protecting its reputation and burnishing its trustworthiness by eliminating the contradiction.

If reputation is so important, why aren’t more companies paying attention to their reputational risks? The reason, according to Argenti, is that “you can’t manage what you can’t measure.” CVS could put a figure on how much it stands to lose by its decision — and $2 billion represents a significant figure even for a major corporation — but it could not put a figure on how much its stands to gain. Corporate reputation is an intangible asset that can’t be identified and captured as easily as short-term financial returns. For that reason, senior managers prefer the short-term financial returns but, as demonstrated by Argenti’s own research as well as research from other organizations that specialize in the measurement of reputation, it is the intangible corporate reputation that is more valuable.

While putting a specific dollar figure on the monetary return of CVS’s tobacco decision may be difficult — data needs to be tracked across the company’s many constituencies for a number of years — Argenti argues that there are unequivocal bottom line benefits that come with a strong reputation. For example, research shows that companies with a strong reputation have a price advantage because they pay less to suppliers and can charge more to customers. They also have a strong competitive advantage for various reasons:

  • They attract the best recruits.
  • They have more stable revenues.
  • They are less susceptible to crises, but should a crisis occur, they are more likely to be given the benefit of the doubt by stakeholders.
  • They are more stable, which leads to higher market valuation and stock price over the long term, and greater loyalty of investors.

Recognizing and addressing reputational risk does more than limit potential damage to the brand down the road; it creates a valuable opportunity for enhancing the brand. Other drugstore chains might follow CVS’s lead, but they will never get the positive reputation boost that CVS enjoyed after it announced its decision (widely praised by the press and even the President of the United States).

To uncover reputational risks, Argenti says, companies must ask two questions:

  1. What are we doing that we should not be doing?
  2. What aren’t we doing that we should be doing?

CVS answered the first question with its tobacco initiative. Coca-Cola, the world’s leading brand of soda, answered the second question with a groundbreaking program involving its use of water. Coke can use from 4 to 240 bottles of water for each bottle of Coke. Recognizing the reputational risk of this water usage, Coke and the World Wildlife Fund (WWF) announced a joint project a few years ago to return all of the water that Coke takes out of the environment. Whether the ultimate goal is achievable, Coke and the WWF have a formal partnership, recently extended to 2020, that has a launched a variety of initiatives to help conserve freshwater resources.

Through these initiatives, Coke was able to turn a reputational risk into an opportunity to send its constituents a positive message of environmental consciousness. Argenti, who is a professor of corporate communication at Tuck, emphasizes the role that communication plays in managing reputational risk. Many companies have found their reputations battered not because of what they did, but because of what their executives have said. A recent example involves the founder of Lululemon, the athletic apparel company, who argued that quality problems with the company’s clothes were the fault of the customers and not the company. “They don't work for some women's bodies,” founder Chip Wilson told Bloomberg TV. “It's really about the rubbing through the thighs, how much pressure is there over a period of time, how much they use it.” The outrage over Wilson’s comments (the latest from a controversial figure with a history of questionable assertions) eventually led to his departure from the company.

The Lululemon story highlights the importance of communication in the age of social media. Wilson’s comments were made to a television network then spread like wildfire through the Internet, twitter and other social media outlets. Lululemon’s brand is so strong that it will probably survive the controversy, Argenti says. However, there will be damage because Wilson failed to credibly take responsibility for his comments. He did not admit the mistake with transparency and honesty — the two basic requirements for effectively handling any crisis.

The message is clear: Be authentic. Mean what you say and say what you mean. “If you do that,” Argenti says, “you will be perceived as a more trustworthy organization because you really are.”

 


Tuck Executive Education at Dartmouth is widely recognized for developing exceptional strategic leaders.





 
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