How To Avoid A Corporate Reputation Crisis

Consumer reviews concepts with bubble people review comments and smartphone. rating or feedback for evaluate.innovation lifestyle In a time when trust in business is declining — Edelman reports an “unprecedented global decline for employer trust” — and a general feeling of being aggrieved by our employer rises, how can leaders understand what is causing this reputation downfall? It’s easy to blame a bad product launch, a CEO scandal, or even a poorly timed statement on social media. News of mass layoffs, such as Amazon’s recent announcement to layoff 14,000 people, certainly doesn’t help. But the real story of corporate reputation is more complex, and is one shaped by subtle perceptions of competence, character, and the collective judgments of others. Dr. Patrick Haack, Director of HEC Research for Grand Challenges, specializes in legitimacy and has conducted much research into corporate reputation. He’s very honest that, academically speaking, the field of corporate reputation is ill-defined. That’s largely because there are many different constructs, definitions, and ways to measure reputation. That said, the key components to consider when thinking of corporate reputation are legitimacy, status, and stigma. “Something that is helpful is distinguishing between capability reputation and character reputation,” says Haack. Capability is related to competence, and in the corporate world, we largely link capability to a company’s financial performance and quality of service and/or product. Character reputation is more about integrity and trustworthiness. But which dimension is more important in driving a positive corporate reputation? “It gets a bit complicated when it comes to that question,” Haack admits. “But it depends on the context. Let’s say something negative happens, like a scandal. We know that negative character cues are more diagnostic than competence cues.” Why is that the case? Well, it comes down to attribution. “If I see a company behaving very badly, I feel like it’s internal to the character of the company,” says Haack. Essentially, it’s the idea that instead of just one bad apple, the whole barrel of apples is rotten. This is also the moment when we realize what the true character of the organization is. In an ethical wrongdoing situation, such as financial fraud or the CEO engaging in an inappropriate relationship with a colleague, one negative character violation can spoil the whole reputation. Conversely, when a company lets people down on the competence side, it’s easier to forgive. “Let’s say there is an accounting mistake or an issue with product safety. It’s easier to give them the benefit of the doubt, so a single capability violation is much easier to forgive,” says Haack. MORE FOR YOU That said, it can take years to build a positive corporate reputation and just a few minutes to destroy it. “But in order to establish a reservoir of favorable reputation, you need this track record of positive competence and character,” says Haack. Measuring reputation “Very foundational to reputation is that a company needs to meet societal expectations to build and keep legitimacy,” says Haack. But an added complication is that reputation lies in the eye of the beholder. For example, Walmart might be highly reputable to investors, but maybe less reputable to employees. There is also the question of aggregation. Given that there are multiple stakeholders with multiple opinions, how do you create a full picture of a company’s reputation? There are two classic ways to measure reputation: surveys and looking at media coverage. However, if companies choose to dig deeper into reputation, Haack encourages them to distinguish between first and second order judgments. A first order judgment is what one personally believes about something; in this case, the character of a business. That’s fairly straightforward to measure. A second order judgment is influenced by what someone believes that other people believe. Second order judgments are a powerful form of social proof and are harder to measure, but they matter because they drive behavior and attitudes. Haack gives an example of how these judgments could play out at work. “Let’s say I’m an employee, and I think rather critically of my company. That first order reputation judgment is not very favorable. However, in my social circle, people are quite happy and they endorse the company. So, my second order judgment is favorable.” It’s the concept of private truths and public lies. Three actions businesses can take to protect their reputation #1: Reward character alongside results. Deliver on your promises and act with integrity. Employees and leaders who demonstrate ethical courage — even when it costs them — bolster a company’s reputation. Yet many companies still celebrate results above all else. The obsession with performance can quietly incentivize corner-cutting or moral compromise, eroding trust long before it becomes a headline. #2: Watch what unfolds in “hidden” moments. Reputation is determined, in part, by the choices made when no one is watching. When a company rewards honesty, transparency, and fairness as visibly as it rewards profit, it sends a powerful signal to employees and stakeholders alike. How you achieve results matters as much as the results themselves. These actions then become part of the firm’s moral DNA. #3: Mind the CEO effect. Personal behavior and corporate identity are intertwined in ways that can’t be ignored. When a CEO stumbles, the negative ripple effects rarely stop at the individual level because there is a tendency for the public to conflate the leader with the company itself. That interdependence means boards and communication teams need to treat leadership reputation as part of corporate risk management, rather than as a separate issue. Editorial StandardsReprints & Permissions