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Welcome to our second annual list of the top ten crises of the year. This was another banner year for corporate crises and scandals.

1. Global Banking

2012 was a particularly harsh year for global banking. Bank of America, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Morgan Stanley, Standard Charter, and UBS all would have been strong candidates to make the 2012 list on their own. Issues included the Libor scandal, rogue traders, fraud, money laundering, and a botched IPO (Facebook), among others. In addition, prominent hedge fund managers were convicted (Galleon) or investigated (SAC Capital) over insider trading, as U.S. authorities significantly stepped up their investigative and enforcement efforts.

All this contributed to a new low in public trust for an industry already held in low public esteem. But how much does this matter? Cynics may argue that while the entire industry is mistrusted, it still fulfills an irreplaceable function in global commerce. Moreover, the size and interconnectedness of global banks may make them (in the words of Andrew Bailey, chief executive designate of the UK’s Prudential Regulation Authority) “too big to prosecute.” Finally, if the entire industry is mistrusted, no one bank can be singled out. But this view is short-sighted; it overlooks the increasing willingness by politicians and regulators to take action. Public officials may act due to genuine outrage or policy concern, or in response to public pressure. The result is that financial institutions increasingly need to play defense; they fight merely to continue existing business practices – not an encouraging prospect.

2. Costa Concordia

Image courtesy of CyrOz via a Flickr Creative Commons license.

Image courtesy of CyrOz via a Flickr Creative Commons license.

According to Karl Marx (a quote recently revived in the movie Argo) history repeats as tragedy and ends as farce. But as the Costa Concordia crisis showed, sometimes the move from tragedy to farce requires no repetition.  As a reminder, the cruise ship Costa Concordia, operated by Costa Crociere S.p.A. and owned by Carnival Corp., partially sank on the night of Jan. 13, 2012, after hitting a reef off of the Italian coast and running aground at Isola del Giglio.  More than 4,000 people on board had to be evacuated (more than thirty were confirmed dead), and the images of the half-sunken cruise liner made evening news across the world (it still warranted a 60 Minutes story as late as last weekend). Things took a turn to the bizarre when it became known that Captain Francesco Schettino had deviated from the ship’s computer-programmed route to treat people on Isola del Giglio to the spectacle of a close sail-past or “near-shore salute.” Captain Schettino was later charged (among other things) with abandoning incapacitated passengers. To refute the allegations, Captain Schettino had claimed that he had fallen into a lifeboat by accident. In addition to these operatic details, the crisis raised serious issues over safety practices at the ship’s operating company, a forceful reminder that, once a company finds itself in the spotlight, all its previous actions will be scrutinized as well.

3. Apple and Foxconn

Image courtesy of plasticpeople via a Flickr Creative Commons license.

Image courtesy of plasticpeople via a Flickr Creative Commons license.

A soaring stock price, passionate customers, and an iconic status are no guarantees against reputational crises. This is one of the lessons from the controversy over labor conditions at Apple supplier Foxconn. Following months of controversy over illegal overtime, inadequate safety conditions and poor workers’ housing, and highlighted by a string of reported suicides by distraught workers, Apple and its main manufacturing contractor, Foxconn, agreed to significantly improve labor conditions at Chinese factories. Foxconn’s decision to make improvements followed an investigation by the Fair Labor Association (FLA) which found multiple violations of labor law, including extreme hours and unpaid overtime. Apple’s initial response was slow and somewhat evasive, but eventually Apple’s new CEO Tim Cook decided to take a leadership position on the issue of global labor standards.

This case illustrates an increasingly important phenomenon: the rise of private regulation of global commerce via reputational crises. The strategy works as follows: advocacy groups target a particularly well-known company that is likely to generate broad media coverage. If successful, the reputational damage forces the company to change its business practices, setting a benchmark for the industry. This “regulatory” activity is entirely driven by private entities, while public entities play little to no role. Even though Foxconn’s compliance with new standards is not mandated by a new law, the practical effect is the same.  This is the force of regulation through reputation.

4. Walmart

It was an annus horribilis for Walmart. What started as an isolated corruption case in Mexico has now engulfed the company as a whole involving senior management and the board. A December 18 article in the New York Times states this as follows: “Rather Walmart de Mexico was an aggressive and creative corrupter offering large payoffs to get what the law otherwise prohibited. ” Moreover, according to the same article, Walmart’s leadership was informed about the allegations, but decided to shut them down. This (still ongoing) issue follows on the heels of  the recent fire at the Tazreen Fashions factory in Bangladesh, a maker of clothing items for Walmart and other retailers. Bangladesh is the world’s second largest apparel manufacturer after China, and the fire, caused by gross negligence, has refocused attention on the country’s unsafe working conditions.

These crises have re-energized the anti-Walmart coalition in the U.S., which had lost some of its steam after Walmart embraced sustainable supply chain practices, universal health care, and even moderated its anti-union stance, at least in some instances.  The case also points to the exposure for globally operating companies due to supply-chain risk: reputational risk cannot be outsourced.

5. Lance Armstrong and Livestrong

Image courtesy of Angus Kingston via a Flickr Creative Commons license.

Image courtesy of Angus Kingston via a Flickr Creative Commons license.

When Lance Armstrong was stripped of his record seven Tour de France titles following the damning report by the U.S. Anti-Doping Agency (USADA), and lost major sponsors Nike and Anheuser-Busch, the crisis quickly spilled over to his cancer foundation Livestrong. Although Armstrong stepped down as chairman, the foundation has faced the difficult challenge of creating a successful separate existence after being so closely associated with its founder.

This is not the first case where a personal scandal has created severe difficulties for associated entities. Examples include Martha Stewart’s Omnimedia, as well as Tiger Woods’ corporate sponsors. The risk associated with highly personal brands is that the personal life of the endorser/founder/owner is closely tied to the success of the business entity. In case of a personal scandal, the positive spillover from an admired celebrity can quickly turn to a reputational crisis for the associated entity, now caused by a negative spillover, especially if the scandal undermines the very values on which the personal brand was built. Things seem to go reasonably well, so far. Livestrong’s donations actually increased immediately after Armstrong’s resignation, though some donors asked for their money back.

6. Susan G. Komen Foundation

Image courtesy of Joel Kramer via a Flickr Creative Commons license.

Image courtesy of Joel Kramer via a Flickr Creative Commons license.

Nonprofits feature prominently this year on this year’s list. This may be a coincidence, or a reflection of a broader trend that managing reputational risk is as important for nonprofits as for companies. After all, what are the assets of successful non-profits other than their people and their reputation?

Nonprofits may believe that they have a reservoir of goodwill, a trust bank account that can be drawn upon when times get tough. This view is largely misguided. Trust does not work like a bank account; it resembles a currency. The same message coming from a trusted source will have more credibility. But if trust is not maintained, this multiplier effect can vanish quickly.  When Susan G. Komen for the Cure, the nation’s largest breast cancer advocacy organization, considered cutting off most of its financial support to Planned Parenthood in late January 2012, it was quickly engulfed in a firestorm of protest, initially stirred by social media advocacy before it reached traditional media channels. Now caught on the battle lines between pro-life and pro-choice advocacy groups, the leadership quickly stumbled. Unconvincing, overly bureaucratic, justifications gave way to a quick reversal of its decision to cut funding for Planned Parenthood. Subsequently, CEO Nancy Brinker and President Elizabeth Thompson announced plans to step down from their posts. But recovery has been difficult. Participation at its signature Race for the Cure is down by 19 percent, according to a recent New York Times article. Once the Komen foundation had been associated with the vitriolic abortion debate, any decision was criticized by somebody, a common feature of highly polarized issues. During last October’s National Breast Cancer Awareness month, the foundation ran a new ad campaign focusing on the individual women whose lives have been saved by the foundation’s work. While this particular attempt to refocus public attention on the mission was well-executed, it remains to be seen whether the Komen foundation can ever fully recover its past status.

7. Chick-fil-A

Another controversial issue, another company. This time the controversy was over gay rights and the company was the family-owned fast food chain Chick-fil-A. The uproar began in late July when President and COO Dan T. Cathy stated that Chick-fil-A supported “the biblical definition of the family unit.” While the deeply religious roots of Chick-fil-A’s founder and family owners were well known, the new comments quickly led to boycott threats by gay rights groups, statements by public officials in cities such as Boston or Chicago that the company was not welcome there, and the decision by the Jim Henson Company, creator of the Muppets, to no longer supply the company with toys.

What made this case particularly interesting was the support of Chick-fil-A by conservative advocacy groups and politicians, including then candidate for the Republican presidential nomination Rick Santorum and former presidential candidate Mike Huckabee. Conservatives asked supporters to increase their visits, effectively organizing a “buy-cott.” The sales impact on Chick-fil-A seems to have been limited, raising the intriguing and somewhat worrisome specter of consumer preferences being significantly correlated with political ideologies. Picture the Whole Foods shopper compared to the Cracker Barrel customer, Starbucks versus Dunkin Donuts. But before embracing another new marketing fad companies should be careful with (unintentionally?) defining themselves as a “Republican” or “Democractic” brand. Otherwise, they will be in for some interesting times.

For more details on the impact of boycotts, see my Harvard Business Review blog post.

8. The BBC

This fall the BBC faced the biggest crisis since its existence. The first blow was revelations that TV personality Jimmy Savile had sexually abused children while he worked for the BBC. Moreover, prior to the revelations by a rival news program, an investigation conducted by a BBC’s news program had uncovered credible evidence that Savile was a pedophile. Yet the BBC canceled the investigation in December 2011, the same month the network ran a glowing tribute to Savile. A recent report on the incident pointed to chaos and confusion rather than a cover-up.

Image courtesy of Elliott Brown via a Flickr Creative Commons license.

Image courtesy of Elliott Brown via a Flickr Creative Commons license.

But that was not all. In the aftermath of the Jimmy Savile scandal, BBC flagship program Newsnight investigated a North Wales child abuse scandal. A former resident of the Bryn Estyn children’s home was reported on Newsnight claiming that a prominent but unnamed former Conservative politician had sexually abused him during the 1970s. Rumors on Twitter and other social media named the politician. After The Guardian reported a possible case of mistaken identity, the politician stated that the allegations were wholly false and seriously defamatory. The accuser unreservedly apologized, stating that as soon as he saw a photograph of the individual, he realized that he had been mistaken. The BBC subsequently apologized.

The decision to broadcast the Newsnight report without contacting the person first lead to further criticism of the BBC, and the resignation of its Director-General George Entwistle. Following Entwistle’s resignation, Lord Patten, Chairman of the BBC Trust, called for a “thorough, radical, structural overhaul” of the organization. Tony Hall, a former BBC journalist and subsequent successful director of the Royal Opera House, was appointed the head of the BBC. While this appointment inspired confidence, the BBC has a tough road ahead.

9. Japanese companies in China

We can now add “country of origin” to the ever increasing list of headaches for today’s multinational companies. The most recent example is Japanese companies operating in China following the controversy over a cluster of uninhabited islands northeast of Taiwan.  This conflict has had severe consequences for Japanese companies doing business in China. Compared to last year, Toyota has seen its sales drop by 49 percent, Honda by 40 percent, and Nissan by 35 percent.

Other examples of this phenomenon  include the 2005 boycotts of Danish products in the Muslin world after the Danish newspaper Jyllands-Posten published satirical cartoons which depicted the prophet Mohammed, as well as the oil company CITGO, which is owned by Venezuela’s state-owned national oil company. Venezuela’s leader Hugo Chávez gave a highly inflammatory speech in 2006 where he called then President George W. Bush the “devil” and “sick man.” As a result, CITGO faced immediate calls for boycotts in the U.S.

These intense reactions are usually triggered by moral outrage, either because of violated national pride or firmly held religious beliefs. In the ensuing angry protests, companies may find themselves the target of popular rage. The strategic options for companies to respond are limited. They usually are well-advised to stay out of the political debate, in part because allying themselves with one government will alienate the other. A more promising strategy is to highlight local roots. The problem with such strategies is that they run counter to a brand-based strategy that has downplayed local independence up to this point. Having it both ways is difficult for companies: you live by the brand, you die by the brand. This insight holds even if the brand damage is beyond the company’s control.

10. The NFL

The NFL is by far the most successful sports league in the United States.  TV viewership is up and fan passion runs as high as ever. Moreover, compared to other leagues (the NHL comes to mind) bargaining issues were resolved successfully leading to a landmark 10 year agreement. So, why did the NFL make the list? No, it’s not the issue of replacement referees, highlighted by the missed call in the Packers-Seahawks game. The issue is player safety, especially the issue of head trauma and concussions that are being linked to dementia and player suicides. In June 2012, more than 2,000 former NFL players filed a lawsuit against the NFL, the biggest sports-related lawsuit ever, accusing the league of concealing information linking football-related injuries to long-term brain damage. The suit alleges that the “NFL exacerbated the health risk by promoting the game’s violence” and “deliberately and fraudulently” mislead players about the link between concussions and long-term brain injuries.

What we have here is an example of slow-burning crisis that remains unresolved and leads to repeated flare-ups, especially whenever another player tragedy hits the headlines. The NFL has responded decisively, donating $30 million to the National Institutes of Health for brain-related research, changing concussion policies, and engaging in ongoing rule changes. That said, at this point there is no solution to the problem. Moreover, some of the policies intended to better protect players are resented by some players, e.g. the controversy over penalties for Steelers linebacker James Harrison. The recent decision by former commissioner Paul Tagliabue to vacate player suspensions over the Saints bounty scandal was a further setback in this direction. Maintaining the popularity of the game while making it safer will be a challenge for years to come.

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I recently was interviewed by Nikkei Business Journal on the occasion of the publication of the Japanese translation of Reputation Rules. The following article, translated from the original Japanese that appeared in the May 7, 2012 edition of Nikkei Business Journal, summarizes the interview. It was translated by Trevor Devlin.

“What Professionals Have to Say

Four Perspectives on Re-establishing Trust

Olympus—shaken by its attempts to hide huge losses. Tokyo Electric Power—which continues to be strongly criticized following the accident at one of its nuclear power plants. There is no space here to mention all the organizations which have seen the damage go from bad to worse due to their inept responses to accidents or scandals. We asked the leading authority on ‘reputation management’ to comment on the keys to riding out the crisis when a company’s reputation is imperiled.

Daniel Diermeier – Professor at the Kellogg School of Management at Northwestern University

Trust in the Tokyo Electric Power Company (TEPCO) has suffered severe damage since the accident at its Fukushima Daiichi (Fukushima No. 1) Nuclear Power Plant following the devastating Tohoku earthquake and tsunami of March 2011.  In addition there is the case of Olympus Corporation, which saw its reputation as a top-flight enterprise suddenly turn into that of a ‘problem company’ when the dismissal of the company’s then president led to the discovery that the company books had been cooked so as to hide enormous losses. Trust in an organization can evaporate overnight as the result of a single accident or scandal, and the situation can then be further exacerbated by subsequent clumsy responses. There have been countless demonstrations of this insight in the past.

In order to safeguard against such a situation, an enterprise must actively make efforts to manage its company image among the general public, in other words engage in ‘reputation management.’

However, even if executives say that they want to manage the reputation of their company, in many cases they do not know how to go about things. With the goal of explaining to such people what risk management consists of, last year I published the book Reputation Rules (Japanese title = Hyoban wa manjimento seyo—Kigyo no fuchin o sayu suru reputeeshon senryaku, Hankyu Communications). In it I introduced the rationale behind reputation management and some specific methods for achieving it.

The first critical element in reputation management is not to leave things to some specialized internal division, declaring for example, ‘That’s a job for the Public Relations Department.’  The reason why is that when an accident or embarrassing incident occurs, no PR Department or other single unit of a company is capable on its own of  stemming the loss of trust or preventing errors in response from causing a snowballing deterioration in the company’s image. That is crystal clear from the cases of TEPCO and Olympus.

It is not easy to restore a reputation once it has been shattered. The loss may be sudden, but the rehabilitation will definitely take a long time. Furthermore, the involvement of the entire company is needed to achieve this end. In order to do that, top management needs to give reputation management the same attention it gives other management capabilities, and make the necessary effort to take the initiative.

Based on that premise, we first need to consider how the reputation of an organization like a corporation is formed. And how exactly can an accident or scandal take a toll on a company’s reputation.  It is necessary to thoroughly comprehend the processes at work here. My analysis will focus on the case of TEPCO, in which the accident at its Fukushima Daiichi Nuclear Power Plant led to major damage to its corporate image around the world.

The reputation of a given company is built upon the “trust” that the company has developed among the customers who are the users of the products or services produced by that company.  I believe that there are four factors which can cause the degree of trust to fluctuate up or down. These four factors are ‘transparency,’ ‘professional knowledge,’ ‘commitment’ and ‘empathy.’

If these four elements are achieved in balanced fashion, the company’s reputation will be enhanced. Conversely, if these four elements are not fulfilled, the firm’s reputation will surely decline.

In addition, by measuring the degree to which it has fulfilled each of these four factors, a company can determine whether or not its corporate reputation is high. Furthermore, it can analyze which factors can be employed to increase customer trust in the company and then adopt appropriate countermeasures. The “Trust Radar” shown below explains this is schematic fashion.

Trust radar

Image courtesy of Daniel Diermeier Consulting

Transparency, the first of these four necessary qualities, does not simply refer to the degree that information is provided to the public. It also addresses the question of how easy-to-understand is the information provided.

If the party receiving the information judges the degree of transparency to be low, it may conclude that ‘critical information is being intentionally hidden.’ For example, what is going to happen if even though critical information is revealed, it is so replete with specialist terminology that the party receiving the information cannot make heads or tails of it? There will be a strong probability that the verdict will be that the use of technical terminology is an attempt to obfuscate an issue. In such an instance, it could hardly be claimed that there is a high degree of transparency present.

In the case of TEPCO, initially the company was reluctant to release information concerning the accident at the Fukushima Daiichi Nuclear Power Plant. Furthermore, the information released in response to demands from the mass media was full of technical terminology, so it was hardly to be expected that the content would be comprehensible to a layman. As a result, no matter how much information TEPCO might release, the impression remained that the company ‘is hiding something.’

Second, there is the factor of ‘professional knowledge,’ which primarily refers to the degree of reliability of the technology that a company possesses.  It is the members of the company themselves who know best about what they are doing, so it is only natural to expect that they would know best how to respond if any problems arise.  Actually, in the majority of cases, professional knowledge does not become a factor in impairing trust in a company as it is simply assumed that the company possesses the necessary expertise.

However, in the case of TEPCO, this professional knowledge element too became a major factor in dissipating trust. Not only was there the fact that a major accident occurred at the nuclear power plant despite the presence of many experts within the company, but also the fact that TEPCO proved incapable of providing clear explanations concerning the methods being used to resolve the phenomena and problems arising from the explosions, etc. following the accident. For that reason, not only individuals who were familiar with nuclear power plants, but also citizens in general, were filled with doubts about whether TEPCO really had the professional expertise required to deal with nuclear accidents. A similar phenomenon was observable in the case of the accident in the Gulf of Mexico in which there was a major crude oil leak from a seafloor well operated by the British petroleum major BP.

The third factor is commitment, which refers to the methods and sense of responsibility displayed in responding to problems.

If a thorny problem such as a major accident or scandal occurs, people expect the CEO (chief executive officer), chairman and other leaders of the corporation to take the initiative and provide leadership, while also accepting the responsibility to explain the situation also work to resolve the issues.

In the case of TEPCO, such expectations were sadly disappointed. Not only did the top executives who were expected to provide expectations rarely appear at news conferences to offer their own explanations, in the midst of the crisis the company’s president himself was hospitalized and completely disappeared from public view. The fact that just when his company was enmeshed in a crisis the president should become unavailable was the worst possible situation imaginable.

Empathy, the fourth factor, refers to feelings of commiseration for victims. The representatives of TEPCO repeatedly voiced apologies at press conferences and in other venues, and they assiduously went about apologizing directly to those people who were forced to lead their lives as homeless evacuees as a result of the accident at Fukushima Daiichi. Nevertheless, many of the people who were being apologized to felt that these were nothing more than pro forma apologies and were not really genuinely coming from the heart.  In this manner, TEPCO managed to violate all four principles required to instill trust.

Incidentally, ever since the occurrence of the previously mentioned spill from the BP oil well, that company has been working to restore the Gulf of Mexico to its original state. These efforts have been well received, and the company has enjoyed a marked recovery in degree of trust, especially in terms of the two factors of commitment and professional knowledge. As a result, the company’s reputation has been begun to rebound in the United States.

What then can be done to enhance the four elements that go into to shaping the reputation of an organization? The key here becomes organizational (corporate) governance. Next, I would like to consider the case of Olympus.

The scandal surrounding Olympus concerned efforts over several years to window-dress the company’s settlement accounts so as to conceal enormous losses. The principal victims in this case were the company’s own shareholders, and not consumers who had purchased the company’s products.

Normally, in such cases in which it is discovered that a firm’s accounts have been window-dressed, the news does not make it to the headlines of the front page of daily newspapers or become a topic for street corner conversation.  Although there are exceptions, such as the case of Enron in the United States, usually such affairs do not become hot topics among average citizens. Why then should it be that the Olympus affair attracted so much attention?

What made the Olympus case special was the “story element” involved. The spotlight on the “stage” of the concealment of the losses was due to the presence of fascinating “actors” and an easy-to-understand story concerning the related “circumstances.”

The main role in this story was played by the Englishman Michael Woodford, the former president of the company. When after he had gained the position as leader of this world-renowned brand name company the Board of Directors suddenly decided to oust him, Woodford refused to go softly into the night and instead reacted by disclosing the company’s internal secrets. The development of events in the case was truly dramatic. They garnered attention from overseas, so that the situation developed into a major scandal which ended up attracting the global media as well as investigative authorities.

In order to resurrect the image of Olympus, which had thus been pulled down into the dust both at home and abroad, at the very least there needs to greatly improve governance by the Board of Directors.

After all, with the very existence of the company in peril, the Board of Directors has no choice but to commit itself to resolutely carrying out reforms. In order to respond to the situation, the Board might have to dismiss its current leadership, or otherwise move to rapidly implement reforms. In a case where the Board of Directors is under the control of top executives, so that it cannot voluntarily make appropriate decisions, it is impossible for it to get a handle on conditions or rectify conditions, meaning that things will deteriorate even further.

In the case of Olympus, if governance by the Board of Directors had been functioning properly, at an early stage there would have been a wholesale shakeup among the directors as well as within the ranks of top management, so that the running of the company would have been entrusted to individuals who could improve the company’s soiled image, or take other such measures. In that case, it might have been possible to extinguish the “fire” at an early stage.

The fact is that when a company has lost the confidence of its customers and investors, there are instances in which it can prove effective to bring in a highly respected third party.

For example, at the beginning of the 1990s in the United States the major investment firm Salomon Brothers (the current Salomon Smith Barney) was plagued by numerous scandals, including improper bids for U.S. Treasuries. Shortly after discovery of the incidents, an executive within the company was appointed president.

This president revamped the management team, inviting in renowned investor Warren Buffett. The market’s immense trust in Buffett proved highly effective in restoring trust in the company.

Such countermeasures for dealing with the situation after problems have caused a company’s reputation to be hard hit require restructuring in terms of corporate governance. Before fashioning and implementing such countermeasures, it is critical to evaluate the impact caused by the problems in question. If managers error in judging the degree of impact, then naturally the countermeasures they adopt to deal with the situation will likely not fare well.

Here I would like to introduce come effective concepts for evaluating the impacts caused by incidents and scandals.

Please take a look at the graph on the following page. The vertical axis represents the degree of shock damage delivered to the corporate reputation by an incident, scandal or other problem, while the horizontal axis indicates the degree of importance the issue has on the business of the company (core business or not). The background considered when creating this graph is that when a given issue arises the reality is that the impact on a company’s reputation will vary according to company and type of industry.

Segmenting reputational risk

Image courtesy of Daniel Diermeier Consulting

For example, in the summer of 2009 the problem of rapid acceleration of Toyota vehicles surfaced in the United States. For all automakers, the issue of the safety of the motor vehicles which are their mainstay products looms very large. But for Toyota the importance of safety surpasses that at other carmakers. That is because the value of the Toyota brand is rooted in its superior product quality vis-a-vis other brands.

I think I can say without fear of being judged wrong that if, for example, the luxury British carmaker Jaguar suffered a similar problem with rapid acceleration, it would not have caused the same amount of reputational damage as what happened to Toyota. That is because for Jaguar owners another concern, namely design, trumps vehicle safety.

Or let’s consider another case. Assume that a case of food poisoning occurred in the United States at the cafeteria of a motor vehicle manufacturer like Toyota. However, since food poisoning has nothing to do with the core operations of the carmaker, food safety or quality would have nothing to do with the core competitiveness of Toyota.

Nevertheless, what would be the reaction if a similar case of food poisoning occurred in the employee cafeteria of the hamburger chain McDonald’s or another major restaurant chain?  Even though the actual fact of there being victims of food poisoning would be the same for both companies, the question of safety in the employee cafeteria would have no direct relationship to the core business activities of an automaker, while it would have a direct relationship to the core business of a restaurant firm. Thus, the impact exerted by an incident on such a corporation’s reputation would be incomparably greater than in the case of the automaker.

In other words, the degree to which a given problem is related to the business activities of an enterprise and the degree of such impact are extremely important considerations. This is the key in determining the scale of the blow that will be delivered to its reputation.

In measuring the degree of the blow to the reputation, another important concept is the “degree of attention paid.”  Specifically, I would say that a judgment needs to be made whether “this issue will become news reported on the front page of major newspapers in Japan and overseas.”

Well then, what kinds of incidents and accidents are likely to become the lead story on page one of newspapers. Two factors are determinative.

First: ‘How important would this issue be considered within the country in question?’ Although a certain issue might garner a tremendous amount of attention within a country, it would not attract nearly as much notice in another country. For example, when it comes to animal welfare, this is very important concern in Great Britain, although that is not true in France. When considering the impact of an issue, it is essential for top managers to understand the cultural background of the country or region involved.

Let me offer another specific example. When it was discovered in 2005 that the now defunct Kanebo Ltd. had embellished its financial results, it became a big story in Japan and a Japanese auditing firm was forced to undergo a major restructuring as a result.  However, there was hardly any real-time reporting of the affair in the United States, and in the United Kingdom it was largely limited to a bit of reporting in the Financial Times.  Kanebo was not a very well known corporate name in Europe or North America. If it had involved a scandal for a company with a international name value on the order of Toyota, no doubt it would have become global news.

In judging the degree of notoriety another important factor is, as mentioned earlier, the degree to which a story line is present or absent. There is always trouble like the Toyoda sudden acceleration issue popping up.  However, what caused the problem to grow so big was the fact that it made a good story.

The initial impetus for the story was an accident in the State of California in which four passengers riding in a Toyota died. The fact that one of the passengers in the vehicle sought to get help by cellphone was given wide coverage in the U.S. media. That triggered strong interest in the U.S. public, and it subsequently developed into a major issue involving a large-scale recall (recall and no-cost correction of the problem).

What top management needs to do in such a situation is to try to understand how their strategic situation has changed. If that had been done, then in the case of the aforementioned accident which occurred in California, it would not have been considered nothing more than an accident on par with about 500 such accidents which occur annually. However, by the time that the story of the accident had become widely circulated, it no longer was merely one incident among a kind of accident that frequently occurs.

What things like this force us to recognize is that managers need to have the skill to quickly judge that ‘this story has spread, and the problem has shifted to another dimension into the realm of crisis.’ No matter what the issue might be, if a good story line is involved, it is going to attract attention.  When that happens, if you try to offer a defense from a technical perspective, then you can be pretty well sure that most people will not be willing to lend an ear to difficult-to-understand explanations. (In fact, it was later proven that the cause of the accident in question was not related to the electronic system in Toyota vehicles, but that vindication took more than a year.)

In order to gain attention, it is common for corporations to try to use the appeal of celebrities, athletes or other well-known public figures to do all they can to attract consumers to that company’s products and services. However, in cases where a good story line causes a lot of attention to be focused on an accident or scandal, the improper behavior of the people involved can make the situation even worse.

I am convinced that people basically want to trust companies. They also expect companies to develop the four components of trust, namely ‘transparency,’ ‘professional knowledge,’ ‘commitment’ and ‘empathy’ to a high degree. When unexpected problems arise, people are overcome with anger and fear, and they feel that these expectations have been betrayed.

Even if a corporation believes that the reactions among people are unwarranted, all they can do is soldier on and strive relentlessly to recover their trust.  In the final analysis, the hearts of consumers are not things that you can expect to control completely.”

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I recently spoke with The Wall Street Journal Japan’s Misako Hida about the future of Japan’s Tokyo Electric Power Company (TEPCO), which was previously at the center of Japan’s nuclear crisis during last year’s earthquake and tsunami. Marking the first anniversary of the Fukushima nuclear plant disaster, we discussed what went wrong with TEPCO’s crisis management strategies, and if the company could possibly recover from such severe damage to its corporate reputation. We also discussed other recent events in Japan such as the Toyota sudden acceleration crisis and the scandal at Olympus. The interview coincided with the Japanese edition of my book, “Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset.”

The original interview (published in Japanese) has been condensed, edited and translated from its original Japanese form by Trevor Devlin.

“It has been more than one year since the Great East Japan earthquake and disaster. With recovery demand just gathering momentum, we have seen considerable fallout from the efforts by TEPCO to impose increases in electricity charges for major contracts as well as households, sharp division of opinion on whether there should be ‘de facto nationalization’ of the company, plans for a major shakeup in management, and a host of other pressing problems surrounding the company. TEPCO’s manner of responding to the nuclear power plant crisis, lack of crisis management consciousness and other issues elicited an avalanche of criticism from foreign media, and now it is also being bluntly criticized by Japan’s domestic media and political and business circles.

If we look back at TEPCO’s track record over the past year, what was its biggest problem? Can it possibly restore the reputation and trust it previously enjoyed in Japanese society as a top-notch infrastructure enterprise? We posed those questions to Daniel Diermeier, author of “Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset” and professor at the Kellogg School of Management at Northwestern University, who is an expert on crisis management, corporate social responsibility and reputation management.

Misako Hida: What critical error has TEPCO made over the past year in response to the nuclear power station crisis?

Professor Diermeier:  It would probably be its failure at reputation management. Crisis management concerning things like natural disasters involves all kinds of issues, including operational problems, safety and financial issues. And although there is a tendency to give it short shrift, there is a need for enterprise reputation management. If a crisis occurs, public attention is going to be focused on that company. Since a merciless spotlight will shine on the firm, recollections of whether or not it got a good handle on the situation may well remain among the public decades later. In other words, competency in reputation management is a vital factor in the creation of a company’s long-term image. For that reason, such things as the Exxon-Valdez oil spill accident involving the international oil major Exxon-Mobil remain in the collective public memory more than 20 years later.

That being so, companies simply have to grapple with these difficult questions related to the management of operational crises and reputation crises. Reputation crisis management involves striving for the capability to keep the “trust” of the public, customers and regulating authorities.

Misako Hida: What is required to maintain or increase trust?

Professor Diermeier:  There are four critical elements involved, and all are interrelated. First, there is transparency. Here the question is whether a company can make the public and other concerned parties feel that it is not hiding anything. Second, it has to back things up with adequate “expertise.”  Third, leadership should be evidenced in a decisive ‘commitment’ (proactive involvement). Finally, there is ‘empathy.’ In other words, the company should show concern for and attentiveness to the needs of the victims.

In the case of TEPCO, all of these elements were lacking. First, there were grave concerns regarding its transparency, sharing of information and clarity. Because of the hospitalization of TEPCO’s president, Masataka Shimizu, there was an impression that the company’s management lacked leadership. There is no denying that top management left the impression that they had passed the ball to subordinates as far as empathizing and providing heartfelt consolation or relief to the victims and others affected by the disaster is concerned. All I can say is that it was shocking that they failed in every single respect. On top of the damage to the environment, this is the reason why TEPCO is under such strong criticism now.

As another example, roughly two years ago there was the case of the massive recall by Toyota Motor in which things unexpectedly snowballed. Here I don’t believe it was a case of a lack of expertise. The company had a clear understanding of the point at issue in the dispute, and carried out a very careful assessment of the situation. Later a report conducted jointly by the National Highway Traffic Safety Administration (NHTSA) of the U.S. Department of Transportation (in February 2011) and NASA showed that Toyota’s position had been correct and that the acceleration problem was not due to a failure of its electronic steering system but rather entrapment of the gas pedal by the floor mat. In the case of Toyota, the only real problem was that it excessively focused on the expert knowledge and forgot about transparency, commitment and empathy with its customers.

Misako Hida: In the case of TEPCO, which of these four qualities was most lacking?

Professor Diermeier: It was transparency. They did not provide the necessary information in timely fashion. When a natural disaster hits, people want to know the “truth.”  If the nation’s people are aware that there are things that are unknown (even to the company or the government), they will accept that fact. Clearly telling the public what is known and what is not known enhance transparency.

Furthermore, and this is also commonly true for other companies, TEPCO excessively used difficult technical language. The public is basically looking for simple, clear explanations. So if too much difficult-to-comprehend technical language is used, they suspect that something is being hidden, or that there is an attempt to dodge the issues.

When directly faced with an actual natural disaster, establishing transparency requires courage by leaders. In the case of TEPCO, the executives may have panicked, and were consumed with anxieties, worried about the long-term effects (of the nuclear accident crisis) on the company and their own careers, and they therefore tried with all their might to create a feeling that they were in control.

Misako Hida: Are such crisis management responses a product of Japan’s business culture?

Professor Diermeier: Not in all cases, but some other companies have the same kinds of issues. In a broader political or organizational sense, traditionally as far as violations related to issues of regulation and safety are concerned, as compared to Great Britain or the United States, ties between regulatory authorities and companies in Japan have been too close, and the former do not maintain sufficient independence. For that reason, when a crisis arises, the government also rushes to defend itself, and politicians are preoccupied with their own survival, so they do things like press for harsh responses towards the companies involved, which also embroils the regulatory authorities in the crisis.

Moreover, because of the desire for perfection found in Japanese society, you have a situation in which it is difficult to get companies to own up to mistakes.

Misako Hida: Can TEPCO regain trust?

Professor Diermeier: That would amount to open-heart surgery for the company, in other words it is comparable to a substantial transformation. They would have to reconsider all kinds of different aspects of their governing mechanisms and processes, as well as their corporate culture, to ferret out whether they are any deficiencies and which areas need to be improved.  There has to be top-to-bottom reconsideration of what needs to be improved. However, under the present management that would be nearly impossible. At the same time as undertaking wholesale revamping of their governing mechanisms, they also need to change their relationship with the authorities.

Misako Hida: Can other companies learn anything from TEPCO’s failures?

Professor Diermeier: Well, first of all, we are now in the age of global media, so the most important lesson to be learned from the example of TEPCO is the recognition that as soon as some incident takes place, the world’s media will come running en masse to report on it.

The next thing that can be learned is that as things now stand it is not enough for companies to be superior from the standpoint of operations and business. They also have to fulfill various other requirements related to things like labor standards and environmental standards. People have come to expect a lot more from corporations than in the past. Companies operating on a global scale are expected to be ‘good citizens.’

For that reason in particular, reputation is very important. If establishing itself as a global brand is an important consideration for a company, along with management competency concerning things like product quality and safety, it needs to establish management competency concerning reputation. Just as with product management and safety management, success demands the strategic mindset, processes and corporate culture essential for a proper reputation.”


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