The British Watergate

Photo Courtesy of Reuters

We are now witnessing the British version of Watergate. What started out as a sordid story about hacking into voice mail accounts and other personal information has now grown to engulf not only the Murdoch media empire, but also the British government (certainly the current one under David Cameron and, possibly, past ones), and Scotland Yard. Every day we see new resignations and arrests. Pundits, politicians, and journalists alike now deplore the decade-long stranglehold of Murdoch’s papers. Charges not only include hacking, but the bribery of police officers to derail ongoing investigations into the practices at News of the World and other tabloids. The resignation and subsequent arrest of former editor Rebekah Brooks and the resignation of Dow Jones CEO Les Hinton have cut deep into News Corp’s inner circle.

Already the British media is full of speculation of a possible arrest of Rupert Murdoch’s son James. And the public is awaiting the testimony of father and son on Tuesday.  Across the Atlantic, U.S. politicians have asked for criminal investigations for violations of the Foreign Corrupt Practices Act and the FBI has been reported to investigate potential hacking into accounts of 9/11 victims.

It is clear that the Murdoch and News Corp. is facing the biggest crises in their history. The BSkyB acquisition has been abandoned and shares have plummeted. But now the very existence of the Murdoch empire is at stake; what’s more, the crisis has now reached deep into the venerable institutions of government, leading to resignations of John Yates, Metropolitan Police’s top counterterrorism officer and Paul Stephenson, commissioner of the Metropolitan Police. Pressure is mounting on Prime Minister David Cameron regarding his cozy relationship with Brooks and Murdoch and his appointment of News of the World‘s former editor Andy Coulson as communications director.

The most upsetting case pertains to Milly Dowler, a 13-year-old girl who was kidnapped and subsequently killed in 2002. News of the World is accused of not only listening to Dowler’s voice mail messages, but deleting messages in order to make room for new ones, which potentially interfered with the missing person investigation and provided Dowler’s family with false hope that the young teenager was still alive.

Nobody knows where the crisis will end. But while breath-taking in its speed and drama, the scandal followed a familiar script.

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 the pillars of news organizations: competence and integrity. The response is defensiveness, which further erodes trust. What was required was a sense of transparency, empathy and commitment to set things right. After almost two weeks, News Corp. finally changed course and took some of the steps that should have been taken much earlier: an apology to the victims of the hacking scandal, the resignation of Rebekah Brooks, and a commitment to reform. But after weeks of fighting back and dismissing the concerns, these steps now look calculated and reactive.

Second, good governance structures pay off in a crisis. According to the New York Times, News Corp. stock routinely trades cheaper than comparable media companies’, commonly known as the “Murdoch discount.” In the aftermath, this “discount” has since hit 30%. Ineffective boards or ill-placed personal loyalties are a problem in good times, and in bad times they are a disaster.

Third, dormant issues can very quickly become life-threatening crises if the roles of the key actors change. One of the striking aspects of the News Corp. scandal is that the allegations of hacking into voice mail messages, private accounts, and bribery of police officers were known 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. Previous tabloid targets were celebrities and politicians, parties that could count on little sympathy from a jaded public. But 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 Murdoch.

Fourth, moral outrage and fear quickly turn public opinion. Once a company loses public opinion, politicians will adjust, turning from friends to enemies in a heart-beat. At that stage politicians and public officials need to save their own skin amidst allegations of inaction or complicity.  Another illustration of the eternal law of politics: Nulli Permanentes Amici Nulli Permanentes Inimici. No permanent friends, no permanent enemies.

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Trust: Bank Account or Currency?

When trying to make sense of complex concepts, we like to use metaphors. We frequently think of money having the properties of water, as in “cash flow” and “liquidity”. These metaphors have important consequences, because they make certain decisions and policies more plausible. Take for example how that once we think of the drug problem as a “war” rather than an “epidemic” certain policy solutions become more plausible (wars are won by armies, not public health professionals, and methadone programs don’t fit).

When we consider corporate trust, one of the most influential metaphors is the “bank account”. Companies “make deposits”, and can “make withdrawals” if necessary. This seems plausible enough, but it suggests certain inferences that are not supported by evidence.  For example, if today I put $100 into my checking account, I can take $100 out tomorrow. Putting aside bank failures and the like, the money will be available when I need it.

In some of our recent research based on laboratory experiments, however, we find little evidence for these claims. In a crisis context, previous “good deeds” are swamped by current actions (good or bad). Trust it seems can’t easily be deposited, it must be earned.

But there is another way to think of the potential benefits of a long-term record of trust. That approach works more like a currency (the fact that currencies require trust adds another interesting wrinkle to this idea). Currencies act like multipliers (not “linearly” as the bank account suggests). That is, if a currency is strong, purchasing power increases for all sorts of goods.  So, what does this mean in the context of trust? The idea is that the same statement carries more weight, has more impact, if it comes from a trusted company.  Or alternatively, a company with a strong record of trust (“strong currency”) will need to do less than a company with a lower record of trust (“weak currency”).

Some recent evidence from the 2011 Edelman Trust Barometer  2011 Edelman Trust Barometer supports this intuition.

Company Trusted	Will believe negative information if hearing 1-2 times	Will believe positive information if hearing 1-2 times
High	25%	51%
Low	57%	15%

In case of “low trust” we find the well-known negativity bias. A negative message has roughly 4 times as much impact as a positive message. But, strikingly, the situation is reversed in the “high trust” case. Now a negative message has only half as much impact as a positive one.  So, by moving from a high to a low trust “currency,” a company gets an eight-fold increase of positive information impact. Not bad, right?
Now, these results are to be treated with some caution. Ideally, one would want to replicate this intended behavior in a controlled laboratory setting. I would be surprised if the absence of negativity bias (indeed a positivity bias) in the “high trust” case would hold up with experimental subjects, but the prospects are intriguing.

Perhaps this approach also can explain Apple’s (and to a lesser extent, Google’s) “Teflon” effect: The apparent limited impact of issues such as the iPhones’ dropped calls/antenna problem and smartphones’ transmission of consumer data. What’s more, survey data from Harris Interactive consistently puts the high-tech industry on top of the most trusted industries. So, even a less than stellar response strategy may have a stronger impact than a comparable (or even better) strategy by a less trusted bank or insurer.

A 2007 Harris Interactive survey measured the public's perception of companies based on key attributes. Source: Harris Interactive's Reputation Quotient Survey, Wall Street Journal.

Bottom line: If the results survive in other research contexts, the case for investing in trust is strong. And don’t think about it as a bank account, but as maintaining the strength of your currency through a record of trusted actions.

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