The recent revelation that the source of Coca-Cola's new bottled water Dasani was not a natural mountain spring but purified tap water from Sidcup, Kent provoked the headline 'Tap water - it's the real thing.' Days later, the entire UK stock of Dasani was recalled when it emerged that the purification process produced illegal levels of the carcinogen bromate. When Proctor & Gamble launched Sunny Delight in the UK in a blaze of publicity in 1998, consumers were soon to learn that this apparently fresh, fruity, child-friendly lunch-box alternative to 'pop' was not the real thing either, but a sugar and e-number-laden concoction later condemned by health experts. When the truth emerged, sales of Sunny Delight plummeted.
When did you last consider whether your business is delivering the 'real thing' to its customers? Are the claims you make for your products and services genuine or misleading? Will customers really flock to the new service you are about to launch? Is your website as secure as it seems?
Is there something unsavoury lurking in your manufacturing supply chain that could erode consumer confidence if it became public? Will you be able to rectify any weaknesses before your business is exposed in the media and forced onto the defensive?
The value of corporate reputation
If customers' experience falls short of their expectations, your corporate reputation can be tarnished. Corporate reputation can account for 30% to 40% of a business's worth, although it usually will not appear on the balance sheet. Reputation may be your business's single most valuable asset.
Reputation does not just have intrinsic current value. It also shapes the way that stakeholders behave towards you, which in turn affects future value and business prospects. In highly competitive markets, having a good corporate reputation can tip the scales in your favour by enabling you to differentiate your product from a host of similar offerings. The corporate halo of a reputable company behind an offer can often be the crucial deciding factor for a prospective purchaser.
Winning new customers is only half the battle; retaining them and building long-term loyalty is perhaps the greater challenge. Even seemingly loyal customers can be fickle: if they lose confidence in you as their supplier of choice they can be notoriously difficult to win back. For evidence you need look no further than the continuing problems at Marks and Spencer.
A risk-based approach
Why is this relevant to risk management? As reputation is such a critical intangible asset, it makes good business sense to identify and manage the risks to it, just as you would for any other asset. Introducing risk management thinking and discipline to sales, marketing and innovation activities can provide a powerful boost to your corporate reputation.
Integrating potential risks to reputation into your business risk management systems is no longer an optional extra.
Your ability to deliver customer promise is not just of interest to your customers - it is also a growing focus for investors, regulators, suppliers, employees, pressure groups and the media. Failure to deliver can reduce sales, erode shareholder value and have adverse affects on local communities.
To identify the risks - both threats and opportunities - to delivering customer promise, you need to consider the perceptions, requirements and expectations of customers and other key stakeholders and evaluate how you match up. Is product quality consistent? Do you treat your customers fairly? Are you living up to the brand promise? Are your products and services always available when required? Are customer details kept secure?
Are you responsive to customer needs? Are you innovating and developing goods and services in anticipation of future requirements? Are your marketing, sales, supply chain and new product introduction practices responsible?
The Inland Revenue faced humiliating teething troubles when it introduced its much-vaunted on-line tax self-assessment system. The system kept crashing and denying access. In May 2002 it had to be suspended following security breaches which allowed some users to view other taxpayers' confidential details. The Revenue's target of 50% of self-assessments being completed online by 2005 began to look like a pipe-dream when it was revealed that only 1% of users were filing electronically after almost two years of operation.
In the retail sector too, customers have high expectations of e-services.
They want a website to provide quick access, prompt service, good security and 24/7 availability. If expectations are not met, customers may quickly defect to a rival supplier.
Change can also breed risk. Extending your brand by moving into new and unfamiliar business areas may generate unwelcome exposures. A football team that expands into merchandising, a restaurant chain that sells T-shirts or offers free toys to children, can face reputational difficulties when critics accuse it of labour abuses in the supply chain, unethical pricing practices or contravention of product safety regulations.
The telltale signs of emerging risks are often missed. A spate of customer complaints, supplier non-conformances or variances in ordering patterns can act as crucial early warning indicators - allowing you to take corrective action. Settling complaints swiftly and positively can generate considerable goodwill and enhance reputation.
Risks in the customer base
Killer risks to reputation may be lurking within your customer base.
As the Parmalat scandal has illustrated, the reputation of suppliers, banks, auditors and other advisers can be tarnished by association with unethical, corrupt or disreputable clients. The Know Your Customer (KYC) mantra is no longer the preserve of the financial services sector. Following recent UK legislation, lawyers, accountants, estate agents and casino operators now also need to report suspected money-laundering, or could face imprisonment.
In the construction and IT industries, bidders often evaluate the credentials of the potential client as part of their project risk assessment. Is the client renowned for making major specification changes? How good is their internal project management expertise? Does the client act with integrity in dealing with suppliers? The right decision may be to abandon the bid: the risk of damaging your own business's reputation may simply be too great.
Investors too are placing greater emphasis on customer and supplier associations.
League tables from institutional investors and rating agencies highlighting potential exposures and naming and shaming laggards are becoming commonplace.
In September 2002, ISIS Asset Management launched a 'green' league table of 10 European banks, focusing on the banks' lending policies to environmentally damaging projects. ISIS's stance was that banks associated with 'dirty' companies ran the risk of damaging their reputations. KYC no longer suffices.
KYCR - Know Your Customers' Risks - should be the new guiding principle.
Having an impressive list of law-abiding, highly regarded, responsible clients can, on the other hand, help to attract new customers, new talent and investment. Association with reputable businesses can add real value.
A boardroom issue
Getting reputation risk management right requires a team effort across the business, from executive and non-executive directors, managers, risk professionals, auditors, public relations, all employees and key business partners. Start by setting the right tone at the top: make discussion of risks to reputation a regular agenda item in the boardroom.
Barclays, beset by reputational difficulties in recent years, has announced the establishment of a new brand and reputation committee, that puts risks to reputation on a par with financial and operational risks. Chris Lendrum, group vice-chairman and chair of the new committee described its role as 'thinking about our worst nightmares and positioning ourselves to prevent them from happening.'
Integrating reputational risks into your overall risk management systems can help you not just avert threats, but also spot opportunities to boost your standing. European retail group Kingfisher's understanding of the environmental threats facing their business encouraged them to investigate alternatives to existing product lines. New products such as peat free compost, energy efficient refrigeration and organic pest control were soon in their stores. A potentially serious business threat was converted into a valuable business opportunity.
A promise kept
Your ability not just to meet, but exceed, the promise to your customers, is one of the key planks of a strong and sustainable corporate reputation.
Getting it right can win you loyal, long-term customers whose attitude towards you can only enhance your positive image and win you yet more business. Getting it wrong can result in plummeting sales, boycotts and damaging media campaigns.
Jenny Rayner is director of Abbey Consulting and author of 'Managing Reputational Risk: Curbing threats, leveraging opportunities', (John Wiley 2003), E-mail: email@example.com, www.abbeyconsulting.co.uk
DELIVERING CUSTOMER PROMISE - A KEY DRIVER OF REPUTATION AND SOURCE OF REPUTATIONAL RISK
The seven drivers of reputation:
- FINANCIAL PERFORMANCE AND LONG-TERM INVESTMENT VALUE
- CORPORATE GOVERNANCE AND LEADERSHIP
- REGULATORY COMPLIANCE
- CORPORATE SOCIAL RESPONSIBILITY
- WORKPLACE TALENT AND CULTURE
- DELIVERING CUSTOMER PROMISE
- COMMUNICATIONS AND CRISIS MANAGEMENT
DO'S AND DON'TS FOR DELIVERING CUSTOMER PROMISE
GET THE BASICS RIGHT - Ensure that your product and service quality is second to none and that your pricing is fair; deal promptly with any failings.
LIVE UP TO YOUR BRANDS - Ensure that you uphold the values that embody your brands. Jealously guard your USP: that unique attribute that differentiates your product or service from your competitors' in the eyes of your customers. Without it, you will lose competitive edge.
Exercise caution over change - Be wary of brand extensions, shifts into new markets, new territories, new distribution and sales channels. Ensure that risks are understood, are acceptable and can be managed.
DON'T OVER-PROMISE - Keep your publicity in check and don't overstretch yourself through spin. Your organisation should be in a position to monitor and report honestly on all of its customer-related activities. Strive to be as you wish to be seen to be.
ENSURE YOUR SERVICES ARE ALWAYS AVAILABLE AND SECURE - Protect your systems and website via robust security measures. Include e-attacks and resultant system failures into your business continuity and crisis management plans.
CRITICALLY ASSESS YOUR CUSTOMERS AND SUPPLIERS Could any of them cause you to become the target of an activist group? Could the projects they are involved in, their values or their business practices, expose you to reputational risk?
BE RESPONSIVE - Show your human face. Regard complaints as a customer whistleblowing charter. Delight customers by dealing with them promptly and honestly.
ACT RESPONSIBLY - Be responsible, so that your customers can be confident that the products and services they buy from you live up to the promise.
EXPLOIT YOUR RISK MANAGEMENT SYSTEMS AND STAKEHOLDER FEEDBACK - Identify and curb those business threats that could damage your reputation.
Pinpoint and leverage opportunities to better meet future customer needs.
Use risk management techniques to both safeguard and enhance your reputation.
"The way to gain a good reputation is to endeavour to be what you desire to appear."
Socrates 469 - 399BC
Socrates' wise statement is just as relevant today. It is as true for corporate reputation overall as it is for delivering customer promise on the products and services that help drive that reputation. Being authentic, being 'the real thing' has never been so important. Positive and systematic management of threats and opportunities to reputation can help to ensure that reality is aligned with perception, and that stakeholder experience matches their expectations. Only in this way can you mould and uphold a good reputation that will be sustainable in the longer term.
REPUTATION AND CSR
Ever-increasing speed of information has made it vital for companies to ensure that their actions match their promises, says non-profit organisation CSR Europe. 'With modern technologies, an investor in New York can find out instantly whether a company is employing a child in an Indonesian factory, or polluting a river in India, and companies have been forced to become more transparent when confronted with accusations from lobby groups.'
CSR Europe stresses that CSR is not just window dressing that companies do to keep critics happy. 'It cannot be denied that the link between CSR and a company's reputation is increasingly being held as a reason to embrace the concept, but critics must also admit that it would be very difficult for a company to fake CSR in the long run.'
Because companies also know that exaggerated claims over their social and environmental performance make them an easy target for pressure groups, many actually shy away from actively communicating their CSR achievements.
Those that do advertise them confirm that their reputation is important to them and that they want people to understand 'what we do and how we do it.' CSR Europe is a network for corporations that are concerned about the social and economic impacts of their business operations. It was founded in 1996 by the European Commission and a few leading European companies.
Since then, it has grown into a network of more than 60 major multinationals, supported by a secretariat of 25 staff. Its work is divided into seven topics:
- Stakeholder dialogue
- Business and human rights
- Socially responsible investment
- CSR communications and reporting
- Business and diversity
- Employee training/lifelong learning
- Mainstreaming CSR.
CSR Europe also runs the European Business Campaign on Corporate Social Responsibility, which was launched as a response to the appeal made by the European heads of state at the European Summit in 2000. The appeal asked business leaders to take on their social responsibility to contribute to making Europe the 'most competitive and dynamic knowledge-based economy in the world.'
Early this year ISIS Asset Management published the first ever investor-led report into the management of social and environmental issues in the supply and disposal chains of information and communication technology companies.
The global study focused on hardware providers, benchmarking 11 leading companies (Canon, Dell, Electrolux, Hewlett Packard, IBM, Motorola, Nokia, Philips, Sharp, Siemens and Sony) against a set of criteria, including policies, lines of accountability and monitoring processes, to determine how effectively they address the social and environmental risks inherent to their supply chains.
The ISIS study highlights how poor performance on social and environmental issues has the potential to impact the bottom line, and the dual pressures faced by companies trying to both cut costs and improve standards. A key conclusion of the study was that while ICT companies often have a strong track record in dealing with environmental issues, their tackling of labour standards lags significantly behind.