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Posted: December 3, 2010

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A client facing local controversy over its proposed nickel mine commissioned a series of focus groups. Since the positions of committed supporters and opponents were already well understood, it asked the consultants to concentrate on people who pledged that their minds were still open. The groups were asked what strengths, weaknesses, opportunities, and threats they saw in the proposed mine. Not surprisingly, jobs and other economic benefits dominated the list of strengths and opportunities, while the weaknesses and threats included possible environmental impacts, concerns about the characteristic boom-and-bust pattern of mining, and uncertainties about the mining company’s plans.

There was one surprise: In group after group, the reputation of the parent multinational corporation kept coming up, always on the negative side of the ledger. People had heard opponents’ messages about the company’s awful record in other places, both as an employer and as an environmental steward. They felt unable to assess the validity of these allegations, and they were reluctant to accept the mine without knowing.

It’s not fair to say that corporate reputation was the number one issue in the minds of focus group participants. Jobs and the environment were by far the top issues. But corporate reputation looked very much like it might be the tie-breaker.

Importantly, what seemed to be on the minds of focus group members wasn’t whether or not the parent corporation had a terrific CSR record. It was whether or not the corporation had an awful record, as mine opponents were alleging. Bad reputation, not good reputation, was the question.

Good Reputations and Bad Reputations

Just about everything I have read about reputation assumes that it’s a single variable. It has components, of course: how trusted, admired, or liked you are; your products and your customer service; your environmental and social performance; etc. But these components can all be summed into a single dimension, where good reputation is on one side of the scale, bad reputation is on the other side, and zero is in the middle. Anything you do to improve your reputation – put out a terrific new product, support local philanthropies, sign onto a human rights charter – moves you a notch or two in the positive direction. Anything that hurts your reputation – an industrial accident, a controversy with stakeholders, a nasty rumor on somebody’s blog – moves you in the negative direction.

The metaphor that’s often used to describe this one-scale vision of reputation is a bank account. Events that damage your reputation are withdrawals. Events that improve your reputation are deposits. Reputation management means making sure deposits exceed withdrawals, so you build a healthy balance of “reputational capital.”

One key implication of the bank account metaphor: Everything’s linear. If you deposit $1,000 and withdraw $1,000 your bank account ends up back where it started. If reputation is like a bank account, then a company that experiences a big reputational enhancement and an equally big reputational hit (in either order) should similarly end up back where it started.

I don’t buy it. I think organizations (and individuals) are much better off conceiving of “good reputation” and “bad reputation” as separate variables. If your positives are high and your negatives are low, you have a good reputation. If your positives are low and your negatives are high, you have a bad reputation. That much is the same whether we see reputation as one variable or two. But consider three different ways of ending up in the middle:

• If your positives and your negatives are both low, you haven’t got much of a reputation. You’re low-profile; people don’t know much about you.
• If your positives and your negatives are both middling, you have a middling reputation. People agree you’re okay but nothing special.
• If your positives and your negatives are both high, you have a good reputation and a bad reputation. You’re simultaneously much-loved and much-hated – usually by different people. (But not always. Some people may have a love-hate relationship with you, loving your low prices, for example, while hating your poor service).

These three possibilities constitute very different ways of landing in the middle between a good reputation and a bad reputation – a reality that the one-variable conceptualization can’t capture.

The third possibility, both much-loved and much-hated, isn’t rare. Think about Wal-Mart, for example – much-loved for its low prices and wide selection (and more recently for its environmental initiatives), much-hated for allegedly damaging mom-and-pop stores, mistreating employees, and bullying suppliers. Or think about Sarah Palin, a poster child for simultaneous high positives and high negatives. For that matter, think about any of the three most recent U.S. Presidents.

The world’s leading reputation guru – the scholar/consultant with the best reputation reputation – is Charles Fombrun, who left NYU’s Stern School of Business in 2004 to found Reputation Institute. RI publishes annual “Reputation Pulse” reports that rank companies by reputation. The U.S. report for 2010 assesses the country’s 150 biggest companies. The eight with the top-ranked reputations all offer much-loved consumer products:

• Johnson & Johnson
• Kraft
• Kellogg
• Walt Disney
• PepsiCo
• Sara Lee
• Google
• Microsoft

The lowest-ranking companies are all in the currently much-hated energy and finance industries:

• Bank of America
• ExxonMobil
• Goldman Sachs
• Citigroup
• Fannie Mae
• Freddie Mac
• Halliburton
• AIG
  (BP isn’t a U.S. company.)

Now look at the companies in the middle of the RI rankings. Some are comparatively little-known among consumers despite their size, like Chubb (#74) and Hess (#77). Some are very familiar, and widely considered neither very good nor very bad, like Gap (#73) and CBS (#79). And some have both strong admirers and strong detractors, like Starbucks (#80).

No matter where a company stands in the RI rankings, it presumably has some admirers and some detractors. Microsoft, for example, ranks an impressive #8 out of 150 – but among economists it is much-disparaged for monopolistic practices, and among IT nerds it is much-derided for general glitchiness. ExxonMobil, though it ranks a dismal #144 out of 150, is praised by industry insiders for an exceptionally good safety record, and by financial analysts for an exceptionally good profit record. It’s not obvious how much emphasis Microsoft and ExxonMobil should put on buffing their reputational strengths versus ameliorating their reputational weaknesses. But surely it’s obvious that buffing strengths and ameliorating weaknesses are different priorities.

Reputation management, in short, is two jobs: trying to be more loved and trying to be less hated.

A Google search of the term “reputation management” will quickly confirm the distinction. The first few pages are dominated by listings (including paid listings) for companies offering to help clients “protect” or “defend” their reputations from attacks, especially attacks on the Web. They’re all about bad reputation: how to prevent it and how to recover from it. A bit lower down, you’ll find Fombrun and others who do research and give advice on how to build and sustain a good reputation.

Actually, reputation management is more than two jobs. Consider this list of reputation management tasks:

1. Try to get people who love you a lot now to love you even more.
2. Try to keep people who love you a lot now from loving you less.
3. Try to get people who love you a little now to love you more.
4. Try to keep people who love you a little now from stopping.
5. Try to get people who neither love you nor hate you now to love you a little.
6. Try to get people who both love you a little and hate you a little now to love you more.
7. Try to get people who both love you a little and hate you a little now to stop hating you.
8. Try to keep people who neither love you nor hate you now from hating you a little.
9. Try to get people who hate you a little now to hate you less.
10. Try to keep people who hate you a little now from hating you more.
11. Try to get people who hate you a lot now to hate you less.
12. Try to keep people who hate you a lot now from hating you even more.

How you prioritize among these twelve tasks will depend on the situation. If you’re a politician facing a close election campaign, #1 is crucial for soliciting contributions and recruiting volunteers, #3 and #4 are central to your GOTV effort, and #5 and #7 are how you woo uncommitted voters.

If you’re a mining company trying to site a controversial project, on the other hand, your most heartfelt wish is doubtless #11. But it’s a long shot. So in practice your top priority is probably #9, followed closely by #10 and #8. You don’t need more and stronger supporters nearly as much as you need fewer and less fervent opponents – unless there’s going to be a referendum, in which case #5 and #4 suddenly become top priorities.

Reputation managers may or may not prioritize consciously among these twelve tasks. But arguably the single most important decision in any controversy is how much effort to focus on strengthening relationships with your natural allies, how much to focus on wooing people who neither support nor oppose you (and don’t much care what happens), and how much to focus on ameliorating the fervor of those who lean against you.

The essence of public relations is trying to generate a little positive feeling among people whose interest is minimal – #5 on my list.

The essence of outrage management is trying to reduce the negative feeling of people who are opposed but not so fanatically opposed that they can’t be reached – #9 on my list.

Reputation consultants like Fombrun are less interested in either of these tasks than in leveraging their clients’ good reputations into extraordinary reputations – #1 and #3 on my list.

The biggest reason for thinking separately about “good reputation” and “bad reputation” is this: What you should do to become more loved and what you should do to become less hated are very different agendas. These two ways of improving your reputation are indistinguishable in the one-variable conceptualization, which sees “more loved” and “less hated” as literally identical. But in the real world, increasing your company’s philanthropic profile and settling your disputes with angry stakeholders aren’t just different activities. They achieve different purposes. Philanthropy increases your positives. Conflict resolution decreases your negatives.

Faced with this choice, my corporate clients are powerfully tempted to focus on increasing their positives. It feels a lot better – safer, more comfortable, easier on the ego – to burnish your reputational strengths than to try to remedy your reputational weaknesses.

And if you’re not especially hated (and don’t expect to be anytime soon), burnishing your reputational strengths may be a good way to go.

But my corporate clients come to me, more often than not, precisely because they are especially hated – more specifically, because strong opposition is getting in the way of achieving their goals (for example, securing their “social license to operate” so they can dig a new mine). Given this state of affairs, it seems obvious to me that ameliorating their negatives is the path forward. They need to focus on addressing their opponents’ concerns and assuaging their stakeholders’ outrage – which means they must resist the temptation to cultivate political allies, increase their support for the Little League, and talk endlessly about their contributions to the economy instead.

Of course it’s not either/or. Even when you’re under attack, increasing your good reputation is a piece of the solution. It’s the piece that feels best – but it’s a small piece. The pieces that feel much worse, like settling disputes with angry activists, have a much bigger payoff.

I think this is painfully obvious: When opposition is the problem, ameliorating your bad reputation makes more sense than augmenting your good reputation. But it’s not so obvious to my clients. And my clients find it less obvious still which kind of reputation management to focus on over the long haul.

Assuming that good reputation and bad reputation are different variables, which is more important under what circumstances? And what, if anything, do they have to do with each other? Those are the two main questions I want to explore in this column.

Which Kind of Reputation Management
Is More Valuable?

Almost none of the work on reputational impact pays explicit attention to the distinction between good reputation and bad reputation. We have evidence that companies with good reputations fare better than companies with bad reputations – surprisingly little evidence, actually, but some. The tough question is whether that’s mostly because a good reputation helps or because a bad reputation hurts.

My guess is that it’s the latter. But that’s a self-serving guess: My own reputation derives mostly from my work on “outrage management” – helping clients reduce their negatives.

Fombrun, on the other hand, is known mostly for his work on the benefits of a good corporate reputation. His consulting firm helps companies in the middle strive for the top, and his writing focuses on what distinguishes the top-ranked companies, not the bottom-ranked ones. Fombrun presumably doesn’t care much about this distinction. He writes about reputation (as most reputation experts do) as if it were a single linear variable, a bank account that’s constantly accruing or losing reputational capital. But if forced to make the distinction between good reputation and bad reputation, he would probably say good reputation matters more.

You can find evidence for either hypothesis in Fombrun’s data.

RI doesn’t just rank the 150 biggest U.S. companies. It calculates a rating for each company (called its Pulse score), which is normalized statistically so the reputation scale theoretically ranges from 0 to 100. The highest-ranked U.S. company in 2010, Johnson & Johnson, came out with a Pulse score of 85.82. The lowest-ranked company, AIG, came out with a Pulse score of 27.06. Halfway between 85.82 and 27.06 is 56.44, which is about where you’d expect the 75th-ranked company to fall out if reputation were linear. But actually the 75th-ranked company (Nordstrom) was rated 69.28 – a lot closer to the best than the worst. The closest to a 56.44 rating was News Corporation – rated 56.16 and ranked a dismal 132nd.

In other words, the 150 largest U.S. companies cluster near the top of Fombrun’s distribution. A bad reputation distinguishes a company from the rest of the pack a lot more than a good reputation does.

On the other hand, the 2010 U.S. Reputation Pulse survey asked respondents whether they would recommend specific companies to others. For the ten companies with the worst reputations, only 19.3% of respondents said they would; the comparable figure for the ten companies with the best reputations was 69.3%. Here’s the Reputation Institute graph showing the relationship between companies’ U.S. Pulse score and the percentage of respondents recommending each company.

The trend line is a convex function, suggesting that a good reputation helps a more than a bad reputation hurts. That’s certainly true at the top and bottom of the distribution. RI’s director of research and analytics, Leonard J. Ponzi, sent me some additional information about this graph:

Improving reputation by 5 points increases the willingness of people to recommend a company by 6.5 percent. Return on reputation is even greater for the 20 most reputable companies, which see willingness to recommend increase 11 percentage points per 5 point Pulse score increase. Companies with weak reputations only see a 4 percentage point increase in willingness to recommend for each 5 point reputation gain.

Odds are in some ways earning a good reputation is more important than avoiding a bad one, while in other ways it’s just the opposite. Let’s start trying to figure out which is which.

Five rules of thumb

There are obviously some situations where earning a good reputation matters more than avoiding a bad reputation. Consider book reviews, for example. People who read book reviews do so at least partly in search of books to read. So a positive review can have a lot of impact; readers make a mental note to go buy the book. A negative review has much less impact. Very few readers of book reviews are “winnowing” books they’ve already identified as contenders, looking for reasons to strike them off their list. They’re looking for books they haven’t considered yet to add to the list. After all, there are millions of books you could read. You need a reason to pick one, not a reason to blackball one. A good reputation makes you likelier to read the book – but you’re no less likely to read a book you’ve heard bad things about than a book you’ve never heard about at all. Positive reputation is more important than negative reputation with regard to book-buying.

First rule of thumb: When people have lots of options, good reputation matters more than bad reputation. That’s the “looking for a book to buy” paradigm.

By comparison, suppose you live in a neighborhood with only one movie theater possessed of only three screens. You are determined to go out to a movie tonight and you don’t want to travel far, so you check to see what’s playing nearby. Then you look at a few reviews to help you make your choice. Now you are winnowing, and bad reviews are likely to have more impact than good reviews. Since you’ve already decided to go to one of three movies tonight, you’ll go to the one with the least bad reputation. (Of course if you no longer go to movie theaters but stream your movies on the Web instead, for you movies are like books. You have infinite choice, and positive reviews are the key.)

Or consider an even more extreme case: You’re supposed to take your kids to a movie today. They’ve already picked which movie they want to see, so you check the reviews. This time good reputation means nothing; the question is whether you’re going to exercise your veto, and only negative information matters.

What about the mining example that started this column? The company wants to dig the mine. It already owns the property; it is well on its way to securing the necessary permits. Community members start off as bystanders. The default condition is to let the company do what it wants. People don’t need a reason to shrug okay. They need a reason to bestir themselves, to interfere, to decide they’re going to fight to stop the mine. In other words, townspeople aren’t in the position of book readers; they’re not trying to pick the very best company for their mine. They’re in the position of parents whose children want to go to a particular movie, trying to decide whether to oppose the plan. A bad reputation is going to do the mining company a lot more harm than a good reputation will do it good.

Second rule of thumb: When options are limited and the choice is mostly accepting the default or raising a fuss, bad reputation matters more than good reputation. That’s the “deciding whether to let the kids go to the movie they picked” paradigm. It’s also the “deciding whether to let the company dig the mine” paradigm.

But the mine example isn’t quite that simple. Mine opponents have made a big point that mismanaged mining operations could pose a serious environmental threat, endangering fishing, tourism, and even public health. Community members have to decide how seriously to take these charges. Environmental risks are the biggest drawback to the mine, and thus the best reason for opposing it. The company can’t honestly (or credibly) claim that there are no environmental risks; instead it must claim that it can be relied upon to manage those risks responsibly. Overall, people’s decisions to oppose the mine or let it happen are still much more determined by the company’s reputational negatives than its positives. But one question about positive reputation is now front-and-center: Does the parent corporation have a reputation for good environmental stewardship?

If the parent corporation has a bad reputation, in other words, that’s a reason to fight to keep it from digging a mine nearby. But if townspeople are concerned about possible environmental impacts, that’s another reason (a non-reputational reason) to try to stop the mine. People who are motivated by the second reason may be deterred from joining the opposition if they learn that the parent corporation has a reputation for first-rate environmental stewardship.

Third rule of thumb: Even when options are limited, once a credible objection to the default has been raised, good reputation matters in assessing that objection. But only on that one issue; overall, a bad reputation still hurts more than a good reputation helps. That’s the “deciding whether to trust the company to protect the environment” paradigm.

I think it’s a tough sell to convince people that any mining company has a reputation for first-rate environmental stewardship. Rather than try, I would urge the company to focus instead on a claim that’s easier to demonstrate: that activists and regulators will be watching it like a hawk, and that the company has no choice but to be responsive to their demands for first-rate environmental performance. This is one kind of positive reputation that really does help a company cope with opposition, controversy, and crisis: a reputation for handling bad situations responsively.

In a serious HSE crisis, for example, people want the company involved to:

• take responsibility promptly;
• accept criticism readily;
• apologize repeatedly;
• show empathy for victims;
• be candid about what it did wrong;
• take effective steps to make it right; etc.

It follows that in a controversy over the possibility of a future HSE crisis, people want to know that the company involved has a reputation for handling crises that way.

People also want the company to handle the controversy responsively. They want it to:

• acknowledge the ways in which its critics are right;
• share control with critics and find ways to be accountable to them;
• give critics credit for improvements they advocated successfully; etc.

These bullet points are the heart and soul of outrage management. Traditional reputation gurus don’t ignore them altogether. They are subsumed under a label like “corporate social responsibility,” which figures prominently in nearly all indexes of corporate reputation. In a 2006 interview with Ernie Landante of Novita Issues Management, for example, Fombrun talks about transparency as a key aspect of a company’s reputation.

Some of what I see as the essence of reducing reputational negatives – that is, of outrage management – is at least a piece of what traditional reputation management experts talk about.

But it’s a small piece of what they talk about. I focus mostly on “corporate social responsiveness” – on responding to critics and setting up mechanisms to ensure that you will continue to respond to them. Most reputation experts focus far more on “corporate social responsibility” – on doing the right thing and demonstrating that you can be relied upon to continue to do the right thing. Responsiveness is a peripheral component of managing your good reputation. It is a central component of managing your bad reputation.

Fourth rule of thumb: A reputation for handling bad situations well is one kind of good reputation that really helps in controversies and crises. People are more accepting of risk and more forgiving of harm when the company is known for being responsive to critics’ concerns, for acknowledging the ways in which critics are right and giving them credit for improvements, for taking the blame rather than scapegoating when things go wrong, and for taking effective action to limit the damage and speed the recovery. That’s the “corporate social responsiveness” paradigm.

Now let’s switch our attention from environmental controversies to stock market investments. There are thousands of stocks you could buy. So shouldn’t we expect stock-picking to be more like our book-buying paradigm than our take-the-kids-to-a-movie paradigm? That is, shouldn’t we expect stock choice and therefore share price to be more affected by positive reputation than by negative reputation?

Yes – but only if we’re talking about those aspects of reputation most directly relevant to the investment decision. When I’m choosing among thousands of stocks in search of the ones most likely to make me money, I’m going to be picking the best, not eliminating the worst. But suppose I’ve already picked a few stocks I want to buy because those companies look to me like they’re going to be exceptionally profitable. Now I’m looking at other aspects of the reputations of that handful of companies – whether they’re good environmental stewards, for example. I’m winnowing. Of the few stocks I have decided are the best investment prospects, are there any I want to eliminate for other reasons? A bad reputation on one of these side issues may get me to eliminate a stock even though I think the company’s a money-maker, but a good reputation on a side issue isn’t going to get me to add a stock to my portfolio that I don’t expect to perform well in the market.

And that’s exactly the way the stock market actually works. The so-called “socially responsible investing” movement is mostly about avoiding socially irresponsible investments. Some say it got its start in the eighteenth century when Quakers passed rules forbidding investment in the slave trade. Over the years, other “sinful” investments were added to the list: guns, alcohol, gambling, tobacco, pornography, etc. Today, socially responsible investors typically avoid companies that are considered inadequate performers with regard to factors like environmental stewardship, human rights, consumer protection, racial and gender equality, and transparent governance.

Of course plenty of venture capital firms and wealthy individuals choose to invest in companies and industries they think will benefit the world: alternative energy, biotech or nanotech, microloan programs, whatever. Some do so in the conviction that they can do well by doing good; others are willing to accept lower profits and higher risks for the chance to influence the course of history in what they consider to be a positive direction.

But the core strategy of socially responsible investment is negative screening. Mutual funds, pension plans, and individual investors generally pick the companies they think will do well financially, and then screen them to make sure they’re not bad guys. They don’t have to be good guys.

Pretty much the same thing is true of socially responsible purchasing, I think. You buy a product or service because you think it’s the best for the job. Assuming you have lots of choices, a reputation for high quality, low price, excellent customer relations, and the like elevates a company to the top of the heap – whereas a reputation for low quality, high price, and rotten customer relations merely keeps a company back with all the others you’re not going to pick.

But I’d expect a reputation for excellent corporate citizenship to increase sales substantially less than a reputation for rotten corporate citizenship hurts sales.

Though socially motivated consumer boycotts are notoriously difficult to sustain, they are occasionally successful. And at least they’re conceivable. One of the most successful such boycotts in U.S. history was the grape boycott of the 1960s in support of efforts by Cesar Chavez’s United Farm Workers Association to unionize California grape harvesters. Like many of my friends, I was happy enough to go without table grapes for a few years in order to help migrant workers fight for a living wage and decent working conditions. But it would not have been possible to persuade me to eat more grapes (or more of anything) than I wanted to eat, simply in order to support an industry that was treating its workers well.

People will sometimes abandon a course of action they otherwise prefer because they disapprove of the company they’d have to deal with. People don’t choose a course of action that otherwise doesn’t interest them because they like the company.

Fifth rule of thumb: Many decisions – like investing and purchasing – start out with lots of options, where good reputation matters most. But once an initial selection has been made, the focus shifts from good reputation about core factors like profitability (for investing) and product quality (for purchasing) to bad reputation about peripheral factors – like corporate citizenship. That’s the negative screening paradigm.

We have reasoned our way to five proposed rules of thumb:

• When people have lots of options, good reputation matters more than bad reputation. That’s the “looking for a book to buy” paradigm.
• When options are limited and the choice is mostly accepting the default or raising a fuss, bad reputation matters more than good reputation. That’s the “deciding whether to let the kids go to the movie they picked” paradigm. It’s also the “deciding whether to let the company dig the mine” paradigm.
• Even when options are limited, once a credible objection to the default has been raised, good reputation matters in assessing that objection. But only on that one issue; overall, a bad reputation still hurts more than a good reputation helps. That’s the “deciding whether to trust the company to protect the environment” paradigm.
• A reputation for handling bad situations well is one kind of good reputation that really helps in controversies and crises. People are more accepting of risk and more forgiving of harm when the company is known for being responsive to critics’ concerns, for acknowledging the ways in which critics are right and giving them credit for improvements, for taking the blame rather than scapegoating when things go wrong, and for taking effective action to limit the damage and speed the recovery. That’s the “corporate social responsiveness” paradigm.
• Many decisions – like investing and purchasing – start out with lots of options, where good reputation matters most. But once an initial selection has been made, the focus shifts from good reputation about core factors like profitability (for investing) and product quality (for purchasing) to bad reputation about peripheral factors – like corporate citizenship. That’s the negative screening paradigm.

As a risk communication consultant, I’m much more interested in reputation components like corporate citizenship than in reputation components like profitability and product quality. When the focus is on issues like environmental stewardship, social justice, and corporate integrity, Google has it right. “Don’t be evil” is the watchword of reputation management. A reputation as a bad guy really, really hurts. A reputation as a good guy maybe helps a little.

Downsides of a good reputation

Sometimes a reputation as a good guy can even hurt. For one thing, it attracts iconoclasts. Just as companies have more investment opportunities than investment capital and therefore need to pick the lowest-hanging fruit, journalists, activists, and regulators have more potential targets than they have staff and time to go after. So they too are constantly picking the lowest-hanging fruit, deciding which companies to attack and which to give a pass.

Companies with really bad reputations are most likely to be targeted – and that’s one of the most important downsides of a bad reputation. This kind of piling on may be unfair, but it’s inevitable. In 1995, for example, Shell’s decision to sink the obsolete Brent Spar oil platform into the North Sea ignited one of the biggest European environmental controversies of the decade. Later that year, Shell was again in the news when the Nigerian military government held a quick show trial and then hanged nine members of the Ogoni tribe (including author Ken Sawo-Wiwa) for crimes they allegedly committed while protesting against environmental damage from Shell oil development in Nigeria’s Ogoniland. The Nigerian hangings were a big story in Europe – not because the European media normally follow Nigerian human rights violations carefully, but because Brent Spar had made anything reflecting badly on Shell a big story in Europe.

Another example is the long-running battle between General Electric and the U.S. Environmental Protection Agency over PCB contamination of the Hudson River. GE dumped PCBs into the river from 1947 to 1977. In 1983, EPA declared a 200-mile stretch of the Hudson a Superfund site and ordered GE to start planning a cleanup. GE resisted – and the company didn’t actually begin its Hudson River sediment dredging operations until 2009. I can’t prove it’s true, but for most of the intervening 26 years I kept hearing from industry and regulatory sources alike that EPA had put GE at the very top of its unwritten regulatory enforcement “shit list,” instructing officials nationwide to crack down on every GE infraction however minor. (Along the same lines, who thinks U.S. regulators are going to cut any BP operation any slack anytime soon?)

But if a bad reputation paints a huge target on a company’s back, a good reputation paints a target too, though a somewhat smaller one. That’s how reputations are made – by bringing down a top gun … or at least trying to bring down a top gun. One of the standard reputation-building recommendations for up-and-coming critics is to attack someone bigger than you are, and build your reputation on your target’s reputation.

When journalists, activists, and regulators are deciding what companies to go after, much-hated companies rise to the top of the list because they’re easy prey. Much-loved companies come next, because bringing down one of those is a game-changer. Companies that are neither much-hated nor much-loved make unattractive targets. In some ways a low profile beats a good reputation.

A good reputation not only attracts critics. It also tells them what to criticize: Find one of the pillars of your target’s good reputation that has been oversold and is therefore vulnerable. Then topple it. Pick a company that has been praised by the left for progressive values and prove that it secretly relies on child labor in Asia. Pick a politician who has been praised by the right for family values and prove that he secretly patronizes prostitutes.

Or pick an oil company that has gained some traction for its advertising claim that it is “Beyond Petroleum” and prove that its alternative energy investments are a tiny percentage of its oil investments. In 2001, British Petroleum formally changed its name to BP and adopted the “Beyond Petroleum” tagline. I argued at the time that “Beyond Petroleum” was a mistake, sure to antagonize critics and draw charges of hypocrisy. And on May 5, 2010, near the start of the Deepwater Horizon spill, I wrote:

BP’s elaborate effort to rebrand itself as “Beyond Petroleum” is likely to exacerbate the reputational damage done by the spill. And justifiably so. It set itself up as a green icon. It thus attracted iconoclasts, eager to brand the rebranding as a kind of greenwashing. Now it will reap what it sowed.

Prioritizing your reputation-building

A lot of this column so far focuses on the distinction between seeking a good reputation and avoiding a bad reputation. When decision-makers have lots of choices, I think, they look mostly for companies with a good reputation on factors like price and profitability. But when decision-makers are winnowing their shortlist, or when they’re trying to decide whether to interfere in what is otherwise a foregone conclusion, they focus mostly on bad reputation about factors like corporate social responsibility.

But for most organizations most of the time, the real question isn’t good reputation versus bad reputation. It’s what to do when you have an intermediate reputation. Or, rather, it’s what to do when you have two intermediate reputations. Some stakeholders rather like you for one bunch of reasons, while other stakeholders rather dislike you for quite different reasons. Which will help most: enhancing the admiration of supporters or ameliorating the grievances of critics? I think it’s the latter.

Certainly in a controversy it’s the latter. Let’s say you’re trying to get new permits to expand your factory and therefore emit more of some pollutants. And let’s say 15% of your neighbors support you, 15% oppose you, and 70% aren’t interested. Which would improve your permitting prospects more: increasing your community support from 15% to 25%, or decreasing your opposition from 15% to 5%?

Clearly the latter. Most of what you can do to arouse more support will also arouse more opposition. So when you go from 15% to 25% support, you’ll probably also go from 15% to 20% opposition. Now you’ve got a much bigger controversy, with 45% of the community choosing up sides instead of just 25%. Lots of support and lots of opposition add up to lots of angry meetings. Decision-makers – like the regulators responsible for granting permits – tend to shy away from controversy. Projects with strong support and strong opposition typically get postponed pending further investigation, which is a de facto victory for opponents. Even if you get your project, moreover, alienating so many losers is a big, big cost: Your bad reputation will shoot through the roof.

But if you can manage to decrease the number of opponents from 15% to 5%, everyone’s temperature goes down. You’ll lose some supporters along the way who think they’re not needed anymore now that the issue isn’t so hot. But that’s okay; odds are they’re not needed anymore. Very little support and very little opposition usually mean you’re pretty free to do what you want … and you incur very little reputational damage for having done it.

My clients face this choice again and again: to build support by harping on their reputational strengths or to diminish opposition by acknowledging reputational downsides and taking steps to ameliorate those downsides. My clients’ natural inclination is to make what I consider the wrong choice.

• Instead of emphasizing what they’re doing to address their critics’ concerns, my clients want to focus on what’s best about their operations.
• Instead of trying to reduce the interest of potential opponents in hopes that they’ll stay uninvolved, my clients want to work to increase the interest of potential supporters so they’ll be likelier to come to the public meeting.
• Instead of trying to end the battle, my clients want to try to win it.

In the mining example that started this column, the question is whether the company should focus its attention on jobs (the main strength of the proposed mine) or environment (its main weakness).

In a controversy, increasing your positive reputation usually means increasing your support – which helps you win battles. Diminishing your negative reputation usually means diminishing your opposition – which helps you end battles. It’s almost always better to end battles than to win them.

Does a Good Reputation Protect Against Reputational Damage?

I have tried to build a prima facie case that building your good reputation is less important than preventing or ameliorating your bad reputation – especially with regard to things like corporate social responsibility. But what if good reputations protect against bad reputations? What if being much-loved reduces how hated you’ll be if something goes wrong?

Most experts on reputation management eventually get around to quoting Benjamin Franklin: “It takes many good deeds to build a good reputation, and only one bad one to lose it.”

But then they usually argue that Franklin wasn’t entirely right. Consider for example this excerpt from a 2007 crisis management article published by the University of Pennsylvania’s Wharton School:

Experts at Wharton say the success of a corporate reputation reclamation project depends on the company’s image when a crisis hits. “The starting point matters a lot,” says Donaldson [Thomas Donaldson, Wharton professor of legal studies and business ethics]. “The old saw that a reputation takes years to accumulate, but can be destroyed overnight, is only half true. If you have a good reputation, you are given the benefit of the doubt. If a company has a bad reputation, it gets the detriment of the doubt.”

Later in the article, Donaldson cites Warren Buffett’s Berkshire Hathaway as an example of a company that survived a reputational crisis well because of its prior good reputation. Berkshire Hathaway’s insurance firm General Re was heavily involved with the American International Group (AIG) insurance company. In 2005, the CEO of AIG was forced to resign because of questionable transactions. Buffett wasn’t directly involved, but Donaldson thinks his and Berkshire Hathaway’s reputations might well have been tarnished if not for Buffett’s good name. “The reputation of Berkshire Hathaway really mattered when General Re was getting hammered. The media gave Berkshire Hathaway every benefit of the doubt because of Buffett.” During the financial meltdown of 2008–2009 (after the Wharton article was published), Buffett and Berkshire Hathaway were again on the fringes of scandal, and again emerged virtually unscathed, arguably because of Buffett’s Teflon reputation.

But the main thrust of the Wharton School article is the importance of apologizing when things go wrong, rather than relying on a prior good reputation to see you through. Another Wharton prof, Thomas Dunfee, comes across as far less confident than Donaldson that a prior good reputation really helps:

Dunfee studies corporate social responsibility (CSR) and whether it has an impact on business results. “There’s an argument that companies should make the extra investment in doing good and [engaging in] philanthropy,” says Dunfee. “The idea is that a company can build up social credits if something goes awry.”

The issue with this line of thinking is that it is hard to quantify what social activities provide the most protection, Dunfee acknowledges. “The common assertion is that CSR activities can provide some inoculation [from future crises], but there hasn’t been anything empirically established.” Most companies, he adds, invest in their local communities, but it’s unclear whether that makes a crisis any easier. Other activities – such as contributing to the arts – may provide little or no effect.

There are three ways a good reputation might help when bad things happen:

I have already argued that “good reputation” and “bad reputation” should be seen as separate variables. Suppose something embarrassing happens to the XYZ Corp. that increases XYZ’s negatives (its bad reputation). There’s no particular reason to think that having high positives will necessarily cushion that impact. But having low negatives will. In other words, XYZ’s good reputation (how loved it is) is one linear variable; its bad reputation (how hated it is) is a different linear variable. Whichever one is affected by an event, it matters where that one started out. It doesn’t matter where the other one started out.

So if you’re worried that future bad news could increase your negatives – earn you a reputation as a bad environmental steward, for example – it’s worth your while now to get your negatives as low as you can. Increasing your positives now, perhaps by making sure everyone knows about your extensive philanthropic activities, won’t help nearly as much when the pollution hits the fan.

The second and third hypotheses are sometimes referred to jointly as the “halo effect.” (This isn’t necessarily a reference to saintliness. In psychology, a halo effect is simply the effect of people’s perception of one thing on their perception of something else.) But the shield hypothesis and the benefit-of-the-doubt hypothesis are worth distinguishing. There’s a real difference between the possibility that people won’t notice your bad acts because of your good reputation and the possibility that they’ll notice your bad acts but forgive them more readily and interpret any unknowns in your favor.

Weak evidence of a reputational halo effect

What’s the evidence that a good reputation mitigates the reputational impact of bad news? There isn’t much. Reputation experts keep claiming it’s so, but they’ve had a lot of trouble proving it.

There’s a lot more evidence, in fact, that a bad reputation exacerbates the reputational impact of bad news. In a 2002 study, for example, W. Timothy Coombs and Sherry J. Holladay asked respondents to assess a hypothetical truck manufacturing company’s industrial accident. Some were told that the plant was a good place to work and a major contributor to the local United Way; others were told it was a low-rated employer and a non-participant in local charities; still others were told nothing about prior performance. The positive reputational information did no good in mitigating how respondents assessed the company’s accident responsibility. But negative reputational information did significant harm.

Coombs and Holladay referred to this result as “the Velcro effect.” Once companies have a bad reputation, they argued, additional negative information sticks to them like Velcro. But a good reputation doesn’t seem to offer any protection.

A 2004 study by Jill Klein and Niraj Dawar also found support for the Velcro effect of bad reputation, but not for the halo effect of good reputation. Favorable information about a hypothetical company’s prior corporate social responsibility failed to mitigate respondents’ assessment of that company’s responsibility for selling a harmful product. But unfavorable information about prior irresponsibility did lead respondents to blame the company more for its product defect. Klein and Dawar concluded that “a neutral image might provide as much protection in a product harm crisis as a positive image, [but] a negative image will be a powerful liability to a firm facing such a crisis.”

In 2006, Coombs and Holladay tried again, in a paper entitled “Unpacking the halo effect: reputation and crisis management.” The authors’ review of the literature concedes:

[E]xperts argue that a favorable prior reputation is an important resource during a crisis (Alsop, 2004; Davies et al., 2003; Dowling, 2002; Fombrun and van Riel, 2003). On a basic level, a favorable prior reputation functions as a bank account containing reputation capital. An organization with bountiful reputational capital can afford to spend or lose some capital in a crisis and still maintain a strong, favorable post-crisis reputation (Alsop, 2004; Dowling, 2002; Fombrun and van Riel, 2003). On another level, a favorable reputation (strong bank account) may act as a halo that protects an organization’s reputation during a crisis (Ulmer, 2001). Although the idea of a halo effect seems intuitively appealing, researchers have tried but have yet to verify the existence of the halo effect (Klein and Dawar, 2004).

The 2006 paper reports two studies, both involving hypothetical accidents but real companies: Disney and Wal-Mart. I’ll describe the Wal-Mart study, designed to remedy methodological problems in the Disney study (which reached similar conclusions).

The authors say Wal-Mart was chosen “because it draws strong reactions, favorable and unfavorable, from people” – but only those with favorable reactions were allowed to participate in the study. Respondents who admired Wal-Mart were told that some merchandise had fallen from a shelf at a Wal-Mart store and injured several customers. Different respondents were given different explanations for the accident. Some were told an employee on a nearby aisle had knocked the merchandise off the shelf (foreseeable human error); some were told the manufacturer of the shelving had used a flawed weld that caused the shelf to collapse (unforeseeable technical error); and some were told the accident’s cause was still being investigated.

It is well known that human error leads to more blame than technical error – an effect this study guaranteed by locating the technical error in a different company entirely, the shelving manufacturer. The research question was whether the halo effect from Wal-Mart’s good reputation among respondents would diminish this difference. Two outcome measures were used: respondents’ post-accident assessment of Wal-Mart’s reputation, and respondents’ assessment of Wal-Mart’s responsibility for the accident. The reputation measure was considered a test of the shield hypothesis: Would respondents resist revising their assessment of Wal-Mart’s reputation downward when they learned a careless employee had hurt some customers? The responsibility measure was a test of the benefit-of-the-doubt hypothesis: Would respondents hold Wal-Mart no more responsible in the unknown-cause condition than when the cause was known to be faulty shelf welds?

Wal-Mart’s reputation ended up significantly lower in the human error condition than in the technical error condition. (Those not told the cause fell in the middle, not significantly different from either of the other two groups.) So the shield hypothesis wasn’t confirmed. Respondents didn’t ignore the accident, and they didn’t shrug off the reputational distinction between human error (Wal-Mart’s fault) and technical error (the shelving manufacturer’s fault).

As for responsibility, respondents in the technical error condition held Wal-Mart least responsible for the accident. But the other two groups were not significantly different from each other. In other words, if the accident obviously wasn’t Wal-Mart’s fault (bad weld by the shelving manufacturer), respondents didn’t hold Wal-Mart responsible – but they held it just as responsible when the cause was still unknown as when the cause was known to be a careless Wal-Mart employee. Thus the benefit-of-the-doubt hypothesis wasn’t confirmed either.

Then Coombs and Holladay redid their analysis, looking only at respondents whose initial assessment of Wal-Mart had been strongly positive (6 or 7 on a seven-point scale). This time the shield effect materialized. There were no significant differences among the three conditions with regard to Wal-Mart’s post-accident reputation – meaning that people who thought very well of Wal-Mart at the outset managed to shrug off the distinction between a careless employee and a flawed shelf.

But even with an extremely positive reputation, there was still no evidence of the benefit-of-the-doubt effect. Respondents in the technical error condition considered Wal-Mart much less responsible than respondents in the other two conditions, which were not significantly different from each other. In other words, even these heavy-duty Wal-Mart fans required real evidence before they were willing to let the company off the hook. Far from giving it the benefit of the doubt, they held Wal-Mart just as responsible when the accident’s cause was unknown as when it was known to be a careless employee.

In their discussion section, Coombs and Holladay wonder whether the shield effect of a very good reputation might be overshadowed by the expectations a very good reputation engenders. They ask: “[D]oes a favorable prior reputation create expectations about how an organization should respond? Will ‘good’ organizations be expected to exceed the normal response?” As they point out, there’s no evidence yet that people hold organizations they admire to a higher standard of crisis response than less admired organizations. But it makes sense. And if it’s true, it means a good reputation can actually set a company up to disappoint its admirers if its management of bad news is only okay. This is another possible downside of a good reputation, and yet another example of my contention that a bad reputation hurts companies more than a good reputation helps them.

If it turns out that a reputational halo effect exists, the expectations issue may well morph it from a benefit into a liability. The shield hypothesis claims that people will ignore negative information about a company with a good reputation because they think so highly of it already. It’s equally plausible that people will feel betrayed by negative information about a company with a good reputation, and will overreact to that information, whereas they might shrug off the same information about a company with a more neutral reputation.

Or perhaps people shrug off bad information about good companies for a while, until some tipping point is reached and the company’s reputation suddenly comes tumbling down around it. How did people who admired BP respond to the Deepwater Horizon oil spill? I was one of them. I had worked with BP for decades; I considered it an oil industry leader in the issues I cared most about, like transparency and stakeholder responsiveness. I didn’t like BP’s “Beyond Petroleum” campaign, but I held onto my overall positive assessment of the company. I saw its Texas City refinery explosion through the same rosy-tinted glasses, as a bad thing that happened to a basically good company. Even in the early days after the Deepwater Horizon explosion, I went easy. (See for example this May 3, 2010 semi-defense.) But as BP continued to screw up, eventually its shield wore through – and I became pretty hostile, as this September 13, 2010 column demonstrates.

BP made a bad situation worse by handling it badly. Other companies have mitigated the reputational harm of a bad situation by handling it well:

• Johnson & Johnson famously handled its Tylenol poisonings well.
• Maple Leaf Foods did a good job handling its 2009 food poisoning outbreak.
• BP itself did an excellent job in an earlier oil spill, the 1990 American Trader spill in Huntingdon Beach, California. (See also my description of BP’s willingness to take moral responsibility for that earlier spill.)

I’m certainly not trying to argue that handling crises and controversies well isn’t important. And I’ve already pointed out that a reputation for handling bad situations well is a useful reputation to have. (That was my fourth rule of thumb.) All I’m saying is that when bad situations arise, a prior good reputation (except for handling bad situations well) won’t help much. And even a prior good reputation for handling bad situations well can backfire if it arouses expectations your company then fails to satisfy.

Expectations may also vitiate the value of the benefit-of-the-doubt effect of a good reputation – if that effect exists at all. Maybe people do give a good company the benefit of the doubt for a while. But if bad things keep happening, we begin to feel that the company is abusing our trust, and we feel used. And we certainly don’t want a company we admire to give itself the benefit of the doubt. We want it to take responsibility.

Fombrun is among the reputation experts who continue to think the benefit-of-the-doubt effect is real. He hasn’t cited any evidence that the effect actually works, but he has some evidence that people think it does. The 2010 U.S. Reputation Pulse study asked respondents how much they agreed or disagreed (on a seven-point scale) with this statement: “I would give the benefit of the doubt to ‘Company’ if the company was facing a crisis.” For the ten companies with the worst reputations, only 18.3% picked 6 or 7, the two most positive options. For the ten companies with the best reputations, 59.3% picked 6 or 7. If you have a really, really good reputation, in other words, a lot more people say they would give you the benefit of the doubt in a crisis than if you have a really, really bad reputation. (Whether they would actually do so remains to be shown.)

After reading the Reputation Pulse study, I wondered about the companies in the middle. RI’s Len Ponzi graciously answered my question. For the ten companies with middle-ranking reputations (ranked 71–80 out of 150 companies), 38.3% picked 6 or 7. That’s almost exactly halfway between 18.3% and 59.3%. So it’s not just companies with an awful reputation that lose the benefit of the doubt, and it’s not just companies with a terrific reputation that get the benefit of the doubt. Throughout the distribution, the higher a company’s reputation, the likelier people are to say they would give it the benefit of the doubt in a crisis.

What about the RI respondents who picked 1 and 2 – exceedingly unlikely to give the company the benefit of the doubt in a crisis? Here the results (provided by Ponzi) weren’t linear at all. For the top ten companies, only 3.1% said they definitely wouldn’t cut the company slack. For the middle ten companies, it was 5.7%, not much different. But for the bottom ten companies, fully 37.3% picked 1 or 2 on the seven-point scale. In other words, a lot of people say they’re ready and waiting to throw the book at a company with a really bad reputation if something else happens to confirm their negative impression. But it doesn’t take a really good reputation to avoid that poised-to-punish posture. A middling reputation will do. The RI evidence suggests that a good reputation may offer companies a bit of a halo effect – and a bad reputation creates a rather more substantial Velcro effect.

Bottom line:

• There’s pretty decent evidence that a prior bad reputation exacerbates the damage done by a new bad act.
• There’s weak evidence that a prior good reputation may shield very strong supporters from seeing reputational implications in a new bad act.
• There’s only a little evidence that a prior good reputation may lead people to give companies the benefit of the doubt when assigning responsibility for a new bad act.

Despite the scarcity of the evidence, I suspect that good reputations do confer haloes that can provide a modicum of reputational support when the news turns bad. But the halo comes at a price. As I discussed earlier, good reputations attract iconoclasts. And when a corporate halo begins to tarnish, then we feel betrayed – and we pile on, we boomerang.

That’s why I sometimes urge clients to seek a low profile rather than a positive one. And it’s part of why giving away credit and claiming responsiveness work better than taking credit and claiming responsibility. (See “Giving Away the Credit: Managing Risk Controversies by Claiming You're Responsive (though maybe not responsible).”)

The folly of stressing good reputation in bad times

In addition to studying the Velcro and halo effects, W. Timothy Coombs has tried to categorize the various strategies open to companies faced with reputational crises. In a 1995 article called “Choosing the Right Words,” he offered this typology (the parenthetical descriptions are mine):

(Note that Coombs has tinkered substantially with this typology since his 1995 article, and has developed his Situational Crisis Communication Theory to try to predict which strategies are likeliest to work for various sorts of crises. It’s pretty obvious, I think, that mortification strategies are your best shot when the crisis is genuine and you’re really at fault. Coombs’s thinking is most helpful for “crises” where you didn’t do anything seriously wrong but you’re getting hammered anyway.)

Pointing to your prior good acts is what Coombs calls “bolstering” – and it’s the main ingratiation strategy available to companies. As Coombs points out, bolstering can’t possibly work unless a company already has a good reputation. The question is whether it works even then.

This much, at least, is clear: Even if having a good reputation may help when something just happened that poses a reputational risk, pointing to your good reputation certainly doesn’t calm people who are upset about what just happened.

We know this in our own lives. Suppose your ten-year-old daughter isn’t doing her math homework, and is in danger of getting an unacceptably low grade in math. You love your daughter, and you’re aware of her many lovable qualities – but you’re really upset about her dilatory mathematics performance. When you upbraid her for messing up in math, will it help her avoid your ire to remind you that she makes her bed every morning and is usually pretty decent to her younger siblings? I don’t think so. You want to talk about her low math grade. She needs to respond to your concerns, not try to distract you with her virtues.

(This is symmetrical, by the way. If your teenage son is chafing at what he sees as excessive parental nagging, reminding him that you changed his diapers, taught him to throw a ball, and still keep a roof over his head and food in his belly is profoundly unlikely to lessen his irritation.)

Let’s assume further that your spouse is much less worried than you are about your daughter’s low grade in math. Your spouse is casually aware of the problem, and naturally hopes your daughter will work it out – but your spouse figures it’s really between the kid and her teacher, and has no intention of getting into the middle. While you come down hard on your daughter for failing to focus on her math, your spouse mostly watches. In terms of my fanatics/attentives/browsers/inattentives distinction, you’re an attentive or perhaps even a fanatic with regard to your daughter’s math grade, but your spouse is merely a browser.

When your daughter changes the subject from her mathematical weakness to her various strengths (she makes her bed; she’s nice to her younger siblings), the strategic distraction irritates you. It may even infuriate you. But your spouse, not being all that preoccupied with math in the first place, may go along with it.

In short, when fanatics and attentives want to upbraid a company about a current problem or misbehavior, trying to distract them with its good reputation is bound to backfire. But it may work okay on the browsers.

At least three other factors are relevant here:

First is whether the company acknowledges the current problem. Sometimes companies try to imply that their good reputation means they couldn’t possibly be responsible for the current problem, or that it means people should simply shrug off the current problem. That’s likeliest to backfire. If a company accepts blame for the current problem, on the other hand, it may be able to suggest – gently – that its good reputation puts the current problem into context. “We feel horrible about the E. coli outbreak that has been traced to our plant. It’s the first food poisoning outbreak our company has had since we opened our doors in 1951.”

Second is whether the company is pointing to an aspect of its good reputation that’s relevant or irrelevant to the current problem. Your daughter isn’t likely to get far trying to ameliorate your anger at her math grade by pointing out that she makes her bed every morning. But she may make some progress pointing out that the rest of her report card is good, and she was doing okay in math too until the most recent marking period.

Third is how aggressively (versus subtly) the company plays the reputation card. I typically advise companies to make sure they stress their apology for the current problem more than their plea of mitigating circumstances (which is essentially what a good prior reputation is). One way to accomplish this is to put the reputational claim in a subordinate clause. “Even though this is our first food poising outbreak since we opened our doors in 1951, even one such outbreak is one too many. We feel horrible about the E. coli outbreak that has been traced to our plant.”

But the most important factor by far, I think, is whom you’re talking to. Browsers – that is, bystanders who are barely paying attention to the current situation – may respond well to being reminded of your prior good acts, your reputational strengths. But fanatics and attentives – people who feel like stakeholders or even victims of the current situation, people who care enough to come to a public meeting – will reliably get more outraged, not less, when you try to change the subject. With them, it is essential to stay focused on what just went wrong. Your good reputation might possibly help a little. But talking about your sterling record of philanthropy at an angry meeting to discuss your contamination of your neighbors’ well water is sure to do more harm than good.

Summary

The principal takeaways of this complicated column are easily summarized in four brief propositions:

Copyright © 2010 by Peter M. Sandman

            

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