A Board’s Eye View of Reputation Management
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Leadership Organizations Mar 2, 2015

A Board’s Eye View of Reputation Management

When bad news surfaces, what is your plan?

Yevgenia Nayberg

By

Roxanne Decyk

In the advisory firm EisnerAmper’s 2013 survey of United States corporate boards, directors reported that their most pressing concern was reputational risk. Recent studies show that when it comes to reputational risk, the stakes are tremendously high. Echo Research claims that the combined value of the reputations of all S&P 500 companies is almost $3 trillion, or 22 percent of total market capitalization.

Of course, the pri­ma­ry respon­si­bil­i­ty for safe­guard­ing a company’s rep­u­ta­tion must lie with man­age­ment. They know the envi­ron­ment, indus­try, com­pa­ny, key con­stituents, and his­to­ry — and have the resources to address the issues. But through its over­sight of the com­pa­ny at large, the cor­po­rate board plays a cru­cial role in man­ag­ing rep­u­ta­tion­al risk.

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Most boards and man­age­ment teams strike a good bal­ance between their respec­tive roles in the rep­u­ta­tion-man­age­ment process. But there is a risk in well-run com­pa­nies that rep­u­ta­tion-man­age­ment pro­ce­dures may lose effec­tive­ness. Lead­er­ship may con­duct an annu­al review of risk, but stop short of deter­min­ing where the next prob­lem will come from or what they will do about it when the prob­lem arrives. So how can boards take ini­tia­tive to revis­it the nature of the risks they face and find ways to man­age those risks before they become crises?

Crit­i­cal­ly, the board must take an active role in rep­u­ta­tion man­age­ment. If exec­u­tives grow too reliant on old sys­tems and pro­ce­dures, they may miss emerg­ing threats. This is why the board must over­see and be account­able — but not respon­si­ble — for rep­u­ta­tion man­age­ment. Short of an actu­al cri­sis, what steps can direc­tors take to ensure that man­age­ment stays on its toes and has a panoram­ic view of the rep­u­ta­tion­al landscape?

Edu­cate yourself

It is not enough any­more for a direc­tor to learn about the com­pa­ny, read the board mate­ri­als, go to board meet­ings, and make site vis­its. To tru­ly under­stand the envi­ron­ment in which a com­pa­ny oper­ates, direc­tors must inter­act with a vari­ety of con­stituents and learn in ways that tran­scend the tra­di­tion­al notions of on-board­ing and diligence.

It is not enough any­more for a direc­tor to learn about the com­pa­ny, read the board mate­ri­als, go to board meet­ings, and make site visits.”

Fur­ther­more, direc­tors them­selves need to be well versed in respond­ing direct­ly to con­stituents on issues relat­ed to the company’s rep­u­ta­tion. Investors are reach­ing out to indi­vid­ual direc­tors, and many com­pa­nies are now com­fort­able with hav­ing indi­vid­ual board mem­bers inter­act direct­ly with high-pro­file stake­hold­ers, includ­ing crit­ics. With respect to board and exec­u­tive com­pen­sa­tion, for exam­ple, the chair of the com­pen­sa­tion com­mit­tee is now expect­ed to meet with investors to explain com­pen­sa­tion deci­sions in con­nec­tion with dis­clo­sures in the com­pa­ny proxy statement.

Choose the gov­er­nance struc­ture that fits the company

There are many schools of thought on how gov­er­nance struc­tures han­dle risks and rep­u­ta­tion most effec­tive­ly. Some believe that risk man­age­ment is the respon­si­bil­i­ty of the full board. Oth­ers believe the audit com­mit­tee is best placed to over­see rep­u­ta­tion man­age­ment, since that is where enter­prise risk man­age­ment resides.

Some com­pa­nies have estab­lished risk com­mit­tees sep­a­rate from the audit com­mit­tee. These tar­get­ed risk com­mit­tees are most valu­able in com­pa­nies still work­ing to estab­lish strong inter­nal poli­cies, sys­tems, and process­es. Oth­ers would rather see a dif­fer­ent type of com­mit­tee address these issues, for exam­ple, a com­mit­tee on health and safe­ty, or a cor­po­rate social respon­si­bil­i­ty or sus­tain­abil­i­ty com­mit­tee. Depend­ing on the size and com­plex­i­ty of the com­pa­ny and the types of risks it might face, any of these gov­er­nance options might make sense.

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Cre­ate a robust intel­li­gence system

Any gov­er­nance effort must include a rep­u­ta­tion­al intel­li­gence sys­tem. It is almost impos­si­ble for the board to pos­sess the breadth of expe­ri­ence need­ed to iden­ti­fy, eval­u­ate, and mon­i­tor every sit­u­a­tion, so hav­ing its own advi­sors in spe­cif­ic areas is crit­i­cal. This is already the prac­tice with com­pen­sa­tion advi­sors and audit firms, but oth­er dis­ci­plines can also find val­ue in expo­sure to out­side experts and stakeholders.

This intel­li­gence gath­er­ing could include peri­od­ic ses­sions where the board inter­acts with inde­pen­dent experts to aug­ment this infor­ma­tion flow. Finan­cial experts, senior gov­ern­ment offi­cials, heads of NGOs rel­e­vant to the com­pa­ny, cyber-secu­ri­ty experts, and oth­ers can bring deep­er exper­tise as well as inde­pen­dent views. In some cas­es it might not be a pop­u­lar or pleas­ant expe­ri­ence — when a min­ing com­pa­ny brings in a Green­peace rep­re­sen­ta­tive to share the NGO’s point of view, for exam­ple — but it is cru­cial for get­ting a firm grasp on poten­tial risks and know­ing how to act on them.

Hire the right CEO

When hir­ing a new CEO from the out­side, the first chal­lenge is to make sure that this per­son is not him­self a rep­u­ta­tion­al risk — whether due to past expe­ri­ence, a mis­matched man­age­ment style, or a pen­chant for liv­ing large” and inter­pret­ing expense poli­cies in an unac­cept­able way.

Aside from the crit­i­cal fac­tors of expe­ri­ence, style, knowl­edge, and exper­tise, the sine qua non for CEO can­di­dates is per­son­al integri­ty. Integri­ty is key because it dri­ves hon­est and trans­par­ent behav­iors and por­tends a man­age­ment style where the exec­u­tive does not look for short­cuts to solve or obfus­cate prob­lems. The ten­den­cy to block the board from access to infor­ma­tion — includ­ing bad news — has a direct bear­ing on risk-man­age­ment effectiveness.

Boards also should con­sid­er how this indi­vid­ual sets the tone at the top. The CEO must live the val­ues of the com­pa­ny and be will­ing to take respon­si­bil­i­ty for set­ting appro­pri­ate cul­tur­al norms.

Have a plan for when things go wrong

Final­ly, many boards do not have an ade­quate response plan for risks that reach crit­i­cal mass. Direc­tors should be alert to overengi­neered, process-heavy approach­es that can act as a secu­ri­ty blan­ket, under which direc­tors and man­age­ment alike are lulled into a com­fort zone defined by the known knowns.”

Some­times even man­ag­ing the first-order risks well is not enough to ensure that the risk is tru­ly mit­i­gat­ed. It is pos­si­ble for a company’s rep­u­ta­tion to be tar­nished even though they have tech­ni­cal­ly done noth­ing wrong — per­haps by con­stituents that they failed to take the time to under­stand. Cor­po­rate boards must ensure that they work with man­age­ment to explore both obvi­ous and new or non­tra­di­tion­al poten­tial sources of risk.

But even when those risks are iden­ti­fied, the most impor­tant part of safe­guard­ing a company’s rep­u­ta­tion is for the board to keep ask­ing, So what? What does this risk mean to us, what are you going to do about it, and what hap­pens if things go wrong any­way?” In the event of a rep­u­ta­tion­al cri­sis, hav­ing debat­ed these ques­tions in advance could mean the dif­fer­ence between a company’s long-term via­bil­i­ty and oblivion.

Rox­anne Decyk, Ford Schol­ar at the Ford Cen­ter for Glob­al Cit­i­zen­ship at the Kel­logg School, is cur­rent­ly a direc­tor on the boards of Alliant Tech­sys­tems, Ensco PLC, Dig­i­tal Globe, and Petro­fac Lim­it­ed. Before retir­ing in 2010 from Roy­al Dutch Shell PLC, Rox­anne served as the Exec­u­tive Vice Pres­i­dent of Glob­al Gov­ern­ment Affairs; Cor­po­rate Affairs Direc­tor and mem­ber of the Roy­al Dutch Shell Exec­u­tive Com­mit­tee; and Vice Pres­i­dent of Cor­po­rate Strat­e­gy. She is pres­i­dent of the Geor­gia O’Keeffe Muse­um and a mem­ber of the Nation­al Asso­ci­a­tion of Cor­po­rate Direc­tors, the Com­mit­tee of 200, the Inter­na­tion­al Women’s Forum, and the Coun­cil on For­eign Rela­tions. She also serves on the Defense Busi­ness Board, a civil­ian advi­so­ry board to the U.S. Depart­ment of Defense.

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