Managing Reputational Risk: Some Observances

"Reputation is a collection of perceptions and beliefs, both past and present, which reside in the consciousness of an organization's stakeholders -- its customers, suppliers, business partners, employees, investors, analysts . . . and the public at large." Jenny Raynor, Managing Reputational Risk, 2003

A number of recent incidents involving reputational risk have occurred showing the need for strict observance of managing a firm's reputation. Most companies spend a great deal of time trying to understand their company's penchant for risk in terms of financial exposure, market pressures, new product development, etc. Few companies spend much time analyzing their vulnerabilities to the firms' reputations. These recent incidents are microcosms of problems suffered by failures of firms like Enron, Bank of New York, Arthur Andersen, etc. Most might have been avoided if all employees had been trained in reputational risk, had understood how their actions might impact their companies' abilities to earn profits and to have empathy for both customers and their fellow stakeholders. Each incident tells a story and provides fertile grounds for firms to utilize Reputational Risk Management as a part of their regular in-house management training programs.

Incident #1: The Fast Food Restaurant

A franchised outlet of a well known fast food company is located adjacent to a community college with a heavy evening student population. The school is located on the cusp of the local Asian and Hispanic communities. The restaurant furnishes fast meal service to students, faculty and administration.

One evening, the manager was away and the serving staff decided to have some fun by speaking only Mandarin to the customers. When customers made attempts to order their food in English, they were either turned away or ignored by the "non-English speaking" staff. The young men and women working there had a great time, but the immediate and, as it turned out, permanent loss of business to a similar establishment one mile down the road, caused the franchise to be sold, at a significant loss.

Of course, the franchise holder had no reason to think that his staff would suddenly refuse to speak English, but a short training program on how to offer the best in customer service might have swayed the servers to do their jobs as they were taught and not to demonstrate their linguistic abilities.

Incident #2: The Clothing Store

A local branch of a well known off-price clothing store offered a sale on bras. A wife asked her husband to stop at the shop before beginning the evening shift as a police officer in that community. The store was not far from the city's civic center where the police department's headquarters were located. The police officer, in uniform, called at the shop, located the sales items that his wife wanted and carried his desired purchases to the closest available cashier. When he was next in line to pay for his goods, the cashier noticed that one of her friends was in line behind the officer. She moved the officer's intended purchased to one side and, ignoring the policeman, proceeded to ring up her friend's goods. The officer pointed out that he was next to be served, but the cashier announced that she was going to assist her friend before she waited on the police officer. The officer pointed out that he was due at work shortly, and asked to meet with the cashier's supervisor. The supervisor arrived after being paged, heard the officer's story and proclaimed, "Oh, I can't deal with that, right now!" and departed.

The police officer left his merchandise on the counter, left the store and went on to work. There he called his wife, explained why he had not made the purchase and complained to her about the cashier's and her supervisor's lack of customer service. Both the police officer and his wife mentioned the incident to several of their friends. There subsequently resulted a sharp dip in sales that can be attributed to poor or non existent customer service.

Not only was there a drop in sales, but the outlet's reputation was damaged; none of the city's police force nor their spouses would shop there again. Poor customer service is one of the quickest ways to ruin a company's reputation.

Here again, is an example of how better customer service training might have helped to sell merchandise, but to also keep a high reputation among the firm's stakeholders.

Incident #3: The Errant Teacher

The administration of the private parochial school was severely shaken when it was reported that one of their long term teachers had had an affair with one of his female students. The police were already on the scene and the teacher was on the lam.

The school is built around good values. The heads of administration knew that, in order to safeguard the school's reputation, it was important to be open with both the law enforcement officers and with the news media, as well as the school community.

The headmaster and his staff worked diligently to choose the right words and the best ways to approach the problem. The staff was interviewed by the press and TV reporters, letters were written to parents and to community leaders. Meetings were scheduled with older students and the issues were met head on.

The episode was heart-breaking for all the leaders and teachers of the school, and that pain came through in the news reports. The public saw the situation as it was -- a rogue teacher had done a terrible thing and the school moved immediately to deal with it and to explain once it had become known. All of the school's stakeholders were advised of the situation. The school's values resonated loudly and clearly; its reputation was not damaged.

This incident, while tragic, might have been avoided if the school's administration had performed either a vulnerability analysis or a SWOT, and, therefore recognized the reputational risk of teachers having affairs with students.

Incident #4: The Teaching Hospital

A small but prestigious medical college was quite concerned about its reputation when it was discovered that some cadavers in the school's willed-body program had been mishandled. Apparently not every body or every body part was where it was supposed to be.

In a word, the situation was ugly. The news media were enjoying themselves when writing about the problem and the TV reporters were having a field day. Local comedians were also using the school as a butt for their jokes. The story could have had very negative consequences for the school's reputation. The medical school notified law enforcement agents of the situation cleaned up the program and answered every question asked by the media and by the investigators.

This incident is very much like the one about the fast food restaurant. As it turned out, some of the medical students themselves were moving the body parts around. It was their joke. Like the servers in the restaurant, the medical students were having fun at the school's expense. It was handled professionally and required the use of a crisis consultant, but, in the end, no damage was done to the school's reputation. A small number of students were expelled and the new student orientation program was modified to make certain that these kinds of games would not be played in the future.

The incidents related here are only the scrapings of the skin. Many more such events take place every day. In most, but not all, cases using one of the vulnerability exercises might have shown these organizations where risks to their reputations lay. That would have permitted making decisions in advance rather than after the fact. Remember, it's always easier to close the barn doors after the horses have been stolen.

These stories also suggest that organizations, world-wide, both for and not-for-profit can benefit from reputational risk management training, of which little is currently being done.

Incident #1: The Fast Food Restaurant

Incident #2: The Clothing Store

Incident #3: The Errant Teacher

Incident #4: The Teaching Hospital

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