Reputational risk is real, important and core business asset 

Tony Jaques reinforces the reality of reputational risk. Debates the comments of a columnist claiming reputational crisis do not significantly affect businesses

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In the recent issue of the conservative online magazine The Critic, regular columnist Ned described reputational risk as ‘pseudoscientific nonsense.’ In response to this remark, a question worth asking is: Why would anyone argue that reputation risk is ‘rot’ or assert that reputational crisis rarely affect the bottom-line?

It might be easy to dismiss this as satire or a weak attempt at contrarian humour, except these bold assertions appear in the context of a seemingly serious analysis of how Coutts in London and its parent NatWest horribly mismanaged their response after shutting down the accounts of political gadfly Nigel Farage, supposedly because his gamey opinions did not align with the values of the 330-year-old private bank.

On the basis that deposits at Natwest actually went up quarter on quarter after the Farage debacle and that vanishingly few customers closed their accounts in protest, columnist Ned concluded that reputation is a much more resilient commodity that is generally appreciated.

It’s true that sometimes a strong reputation can help weather a storm. The problem, of course, is that profitability is a very dubious measure of reputation.

Think no further than big oil, big tobacco, big pharma, big finance, and others continuing to make massive profits despite persistent reputational shame. Alternatively, consider Qantas, which slowly squandered a stellar reputation; PricewaterhouseCoopers (PWC), which almost overnight went from untouchable to pariah; or Boeing shares floundering after repeated operational disasters.

Ned’s article compared the Coutts Bank case with the so-called Dieselgate crisis at Volkswagen in 2015, which, as he points out, generated an ocean of media outrage over deliberate efforts to conceal exhaust emissions. Nevertheless, after heavy fines and a brief decline in sales, VW is still the world’s second-biggest auto-maker. Moreover, he could have added that Toyota also suffered heavy losses and falling share value after a series of quality issues in 2009-2010, yet soon regained its place at world number one.

However, these two well-known cases don't demonstrate that reputational risk is ‘rot’ or that reputational crises rarely have an effect on the bottom-line. Quite the opposite. They demonstrate that the two auto giants were able to call upon massive international reserves of customer loyalty and product reputation built up over many years, unlike just about any bank in any country.

Crucially, the fact that some cases of corporate wrongdoing do not damage long-term reputation should not be taken to suggest that reputation is somehow unimportant or indicates a guide for other organisations.

The truth is that reputation is a core business asset that any executive ignores at their peril. There is hardly a better example than the infamous case of British high street jeweller Gerald Ratner, cited by Ned, who told a business lunch that some of his own products were 'crap,' which led to the complete destruction of his chain of stores.

Ned's column described Ratner's astonishingly ill-judged speech as self-deprecating and witty and suggested the ensuing financial disaster may have resulted from more than a whiff of anti-Semitism.

However, even mentioning and mischaracterizing such a notorious case demolishes his basic argument about the supposed unimportance of reputation risk. Just ask some real experts, for example, one international survey of more than 2,000 business leaders attributed 63 per cent of a company’s market value to its reputation. In fact, 40 to 60 per cent, depending on the business sector, is a commonly accepted range for reputation as a share of market value. That’s a massive amount to put at risk.

Ned concluded with this unhelpful and maybe ironic advice: “Free yourselves from the reputational risk committees and fire your whining PR men. Trust me, you will never be more happy – or more prosperous.”

Perhaps he should look at Elon Musk dumping his entire PR team and how well that turned out for his reputation.