To mark the first year of the Reputation Rules: The Blog, we are publishing our list of the Top Ten Reputational Crises of 2011. The idea is to not just look back on these events, but also to draw some general lessons from these cases. There are many more that could have been added (Olympus, Johnson & Johnson, SC Johnson, German Federal President Christian Wulff, Dominique Strauss-Kahn, the Governator, and many more), but here are the ones that made the list.
- News Corp.
What started out as a sordid story about hacking into voicemail accounts and other personal information has turned to an annus horribilis engulfing not only the Murdoch media empire, but also the British government and Scotland Yard: a British Watergate. After a year full of arrests, resignations and investigations, News Corporation and the Murdoch family are facing the biggest crises in their history. The BSkyB acquisition had to be abandoned and shares have plummeted. James Murdoch, the company’s likely heir apparent, is now in the crosshairs of government investigations to determine whether he knew more about wide-spread hacking than originally admitted. Observers have called his position “untenable” and the investigations having reached a “tipping point.”
Nobody knows where the crisis will end. But it’s already offering a few lessons.
First, newspapers and media companies are especially bad at managing reputational crises. This is not only illustrated by the News Corp. crises but other cases such as the Jayson Blair scandal at the New York Times or “Memogate” at CBS’ 60 Minutes. Operating in an intensely politicized atmosphere in their daily lives, news organizations typically interpret any criticism immediately as another politically motivated act and miss the underlying business issue—a crisis that threatens competence and integrity, which are the pillars of news organizations. The response is often defensiveness, which further erodes trust.
Second, good governance structures pay off in a crisis. Ineffective boards or ill-placed personal loyalties are a problem in good times; in bad times they are a disaster.
Third, dormant issues can very quickly become life-threatening crises as public perception tends to change rapidly. One of the striking aspects of the News Corp. scandal is that the allegations of hacking into voicemail messages and private accounts and bribing police officers were ongoing for years. But the dynamics dramatically changed when the reports related to Milly Dowler (and other similar cases such as murder victims or soldiers killed in action) surfaced in early July. The horrific case of Milly Dowler and her family immediately triggered reactions of sympathy for the victims and disgust and outrage for the new villains: News of the World, News Corp. and Rupert Murdoch.
Fourth, once a company loses public opinion, politicians will adjust, turning from friends to enemies in a heartbeat. At that stage politicians and public officials need to save their own skin amidst allegations of inaction or complicity.
- TEPCO and the Japanese Government
Whenever disaster strikes, companies and governments are not only criticized for their immediate handling of the crisis, but also their ability to reassure the public. Maintaining trust during a crisis is just as important as solving the crisis at an operational level. Both TEPCO and the Japanese government were criticized for lack of transparency and timely release of information.
What also became apparent is that leaders are not only in the spotlight for their current conduct. Indeed, their preceding actions (or inaction) too come under heavy scrutiny. TEPCO’s history of safety violations quickly took center stage, while the Japanese government was criticized for lack of oversight and a too cozy relationship with the nuclear power industry.
For an early assessment of the Japanese crisis, see my video interview with the Kellogg School of Management.
Next we have two crises involving universities.
- Penn State
The revolting details of the Penn State case have dominated U.S. headlines over the last months. While the future of the protagonists in this sordid tale is now decided in the courts there are important lessons here for any business, but especially for universities and other non-profits.
First, “crimes of omission”, i.e. looking the other way, not acting forcefully or simply the lack of appropriate processes are unacceptable in today’s business environment. An organization’s reputation critically depends on the decisions of its people, including what they neglect to do. Lack of awareness, missing processes, or confusion over values is deadly. No institution can simply count on its members to “do the right thing”.
Second, universities (and other non-profits) are especially at risk when those entrusted to them are victimized. While for-profit companies are typically thought of as being competent—but not necessarily caring—nonprofits are seen as being caring, but not always competent. These perceptions are considered a given; they are “table-stakes”. Losing them threatens the very core of the institution.
Finally, sage words on the reputational risk of universities from a somewhat unlikely source: a rating agency. In its evaluation of Penn State’s credit rating, Moody’s Investors Service stated the following:
“Higher education is first and foremost a business that is driven by reputation…Student demand, the attraction of faculty, and the ability to draw donations are all based on reputation.”
- Politicians and Plagiarism
Our first German crisis takes us to an unlikely domain: doctorates for politicians. Many German politicians have obtained doctorates, frequently in the social sciences, history or law. Last year saw a wave of plagiarism allegations against German politicians. The most prominent casualty was the German defense minister Karl-Theodor zu Guttenberg (above), who not only lost his “Dr.” designation but also had to resign from the German government and (perhaps temporarily) exit political life.
The scandal also heralds a subtle shift in the control over scientific expertise and quality. The initial charges and evidence were the result of a crowdsourcing effort on a Wiki called “Guttenplag”. Guttenberg’s degree-granting university (the University of Bayreuth) found itself first on the back foot, but then stated that the minister had “extensively violated academic standards and intentionally cheated.”
Our next two crises illustrate the risks of brand-driven strategies: you live by the brand, you die by the brand!
Crises can come from anywhere, and just when you think you’ve seen it all there comes an example that is truly jaw-dropping. Such is the case of the German insurer Hamburg-Mannheimer, now part of ERGO, which itself is owned by the insurance giant Munich Re, which counts Warren Buffett as an investor. A staple of German advertising lore, it featured a long running advertising campaign featuring a conservative insurance agent “Herr Kaiser” and his trademark greeting, “Nice to see you.” Overall, it presented a reliable, if a little boring image of stability and personal attention.
Boring no more. After its acquisition, ERGO engaged in an aggressive advertising campaign with goals of defining itself as a consumer brand with a focus on trust, clarity, and transparency. In May 2011, however, the German press discovered and reported that Hamburg-Mannheimer had organized an “incentive trip” for its 100 best salesmen in 2007. The company had rented the famous Gellert Baths—an art deco spa in Budapest, Hungary—and hired about 20 prostitutes. The prostitutes wore color coded wrist bands to indicate which men (ranked by sales performance) were allowed to have sex with them. (Prostitution is legal in Hungary and Germany).
A few weeks later, the German press reported that during 2005-06 the company had overcharged 70,000 customers nearly $234 million for the so-called “Riester-Rente”, a state-subsidized retirement product. Subsequent reports suggested that errors may have been known to the company as early as October 2005. In addition, sales representatives allegedly had advised clients with existing life insurance policies to switch to accidental insurance policies. This resulted in higher commissions for sales representatives, but was frequently not in the financial interest of the customer.
The initial company response was slow and defensive, despite the fact that the company knew this was coming – a rare luxury in a reputational crisis. Three weeks after the initial report, and after intense pressure on the CEO, ERGO outlines new processes including the creation of a whistle-blowing hotline and the appointment of an external body to monitor operations and conduct regular compliance audits. The company also outlined its plan to create new guidelines for incentive schemes.
One of the more interesting aspects of the ERGO crisis was the apparent mismatch between brand positioning (a focus on trust and transparency) with an aggressive sales culture. Reputational ambition needs to be connected with reality on the ground. Otherwise, the next crisis is just around the corner.
See also my case study in the Financial Times
It was a horrible year for Reed Hastings, Netflix’s CEO and Fortune’s 2010 “Business Person of the Year.” The stock is down almost 2/3 for the year, currently trading at about $69 per share after having reached $300 per share earlier this year. A calamitous change in its pricing model, followed by the “Qwickster” disaster, lead to a mass exit of subscribers. Netflix now expects a loss for 2012 and the web is suddenlyfull of “Netflix haters”.
This is a stunning fall from grace, but it illustrates a broader point. Brands are now largely about trust, but trust is fragile. When trust is violated (or perceived to be violated), trust quickly turns to betrayal, and passionate support to rage. Add to that the difficulty of operating in a (social) media environment with less and less control over the message customers receive, and this new brand fragility is not an exception, but a common risk that needs to be managed.
The next two crises have their roots in severe problems of governance (we could have added News Corp. to that list). Well-functioning governance structures are critical during a crises, and here they are the trigger for the crisis.
- HP’s Board
A year after the controversial ouster of CEO Mark Hurd, HP’s board again made negative headlines, this time for its dismissal of Léo Apotheker, less than a year after his appointment and after endorsing his strategy for transforming HP. Again there were reports of leaks by board members and deep divisions within, leading CNN Money–among many others–to ask: “Is HP’s board the worst ever?”
A year of corruption allegations, investigations, resignations, and the highly controversial reelection of FIFA president Sepp Blatter, all on the heels of a heavily criticized selection process for the World Cups of 2018 (to Russia) and 2022 (to Qatar). Blatter then had to apologize for controversial comments on racism in soccer, reigniting calls for his resignation and thorough governance reform.
We typically do not think of sports governing institutions as bodies in need of reputation management, but not only are their responsibilities broad (they determine rules, collect dues, negotiate TV and advertising contracts, sponsor local development initiatives, etc.), they are entrusted with ensuring the integrity of the game, and its history.
- The U.S. Government
The reputation of countries is measured in different ways, bond ratings being only one of them. The U.S. political system has had a rough year. As the country watches another example of Congressional brinkmanship, many observers ask themselves how it could have come this far. There are many explanations for the ongoing inability of the U.S. political system to come to decisions, from the surge of the Tea Party to positioning for the 2012 Presidential Election. But down-to-the wire budget negotiations are nothing new to the U.S. political landscape. The worst consequences are mostly avoided, but sometimes bad outcomes result, as in the 1995 shutdown of the federal government. As a consequence, passports and visas were left unprocessed, national parks were closed, and veteran services curtailed.
Through its extensive set of checks and balances, the U.S. Constitution was designed to force policy makers into these bargaining situations. The need to find common ground between the president and the chambers of Congress would ensure moderate policies with broader support. Other democracies, such as Great Britain, lack this structure, as parliamentary democracies encourage unity between the executive and its supporting majority in parliament. There are pros and cons to each structure. A British Prime Minister can make far-reaching decisions without periods of extensive bargaining. This was last seen in the austerity measures passed in October 2010, which implemented far more radical cuts in the UK budget than discussed in the current U.S. debate. On the other hand, the possibility of radical change can lead to highly disruptive policy changes as different parties assume power, as seen in the waves of nationalization and de-nationalization of British industry in the 70s and 80s.
Such inefficient policy shifts are far less likely in a system of checks and balances, but in addition to the usual bargaining shenanigans known from any negotiations, there are unintended consequences that make the current situation particularly severe. In a paper with Roger Myerson, the 2007 Nobel laureate in Economics, we have argued that a system of checks and balance can create incentives for Congress to create inefficient decision structures. The argument goes as follows: in a bargaining situation each chamber wants to get the best deal for its members and their constituents. By creating internal veto players, such as powerful party leaders and committee chairs that need to sign off on any deal, the chamber can secure a better outcome for itself.
The problem is that having more players that need to agree makes a deal less likely. The consequences are fewer agreements and an inability to pass tough policies and gridlock. What can be done?
First, anything that creates bonds across chambers will be a positive step, whether these are joint committees or strong personal relationships. Second, voters that hold members of Congress accountable for failure change the incentives to engage in intransigent behavior. Third, moving from a system where all chambers have to agree with the president to one where only one chamber needs to sign off would create incentives to remove internal hurdles and lead to more efficient bargaining while maintaining the quintessential features of checks and balances.
For more, see my blog post “Checks and Balances and the Debt Ceiling Crisis”.
- The Republican Candidates
This year’s installation of the demolition derby known as the U.S. primaries demonstrated the limits of managing reputational crises. Even the short-lived popularity of Herman Cain’s “9-9-9” tax proposal could not overcome ongoing allegations of sexual harassment and adulterous affairs, and feeble attempts of humor could not save Perry from his “senior moment”.
For my take on how Herman Cain and Rick Perry handled gaffes during their campaigns, please see the Huffington Post’s “Perry, Cain manage crises with humor, defiance”.