Reputation Damage: Black Pelican or Black Swan?

The emotive image of the BP crisis is a helpless pelican covered in oil, yet the event that gave rise to the oil spill was a Black Swan event: low probability but high impact. If multi-national corporations the size of BP and Toyota can suffer expensive and corrosive reputation damage, what can other smaller businesses learn from their experience? Every PR agent with some talent for crisis management will tell you there are three factors which determine the degree of damage arising, and each can be mitigated to some extent.

The degree of reputation damage depends on a combination of prior reputation quality (sentiment in the bank of goodwill), association with cause of the crisis itself (whose fault) and ultimately the handling of response to it (prompt recall). Any one of these can prolong the crisis and compound reputation damage. Neither BP nor Toyota had sufficient invested in the bank of goodwill in the US prior to their respective crises. Furthermore each corporation was undeniably the creator of its own crisis, neither an innocent victim. Ultimately neither corporation responded with sufficient urgency or contrition to their respective crises thus exacerbating reputation damage.

Mitigating for these three damage determinants requires an awareness of causality often lost in the sheer scale of multi-national conglomerates. However there are three behavioural factors which are more about corporate culture than the crisis itself. Put simply the corporate culture is often part of the problem not the solution. The three cultural factors which compound damage are information management, decision making and self belief.

Information management - the management of information flow in a national company is difficult enough just up and down the hierarchy. How much detail needs to flow upwards and how much policy needs to flow downwards? Who decides which management levels to empower with control of the flow? The chief executive cannot be party to every operational decision in a large firm, delegation is essential to deliver business goals. In the same way institutionalising strategy through new policies takes time to produce change in operational practices and workplace behaviour, even without sub contractors and partners. Senior management rarely know enough about any incident in advance of it becoming a crisis, through imperfect information flow. Add in language and cultural differences to see how information flow is a crucial part of the problem.

Decision making – with a devolved management structure it is often left to local operators to make decisions about risks. The corporate appetite or tolerance level is often not known or the relationship between key factors not appreciated. In both BP and Toyota to varying degrees the cost of interrupting production to investigate safety concerns was a local decision influenced by performance targets. With hindsight such savings are very high risk but in the workplace environment perception of risk is by necessity very different. Corporations mindful of shareholder returns are frequently loathed to interrupt a business without clear evidence of need. Such a culture is not helped when risk officers report to finance people who take a business decision based more on probability of occurrence than severity of impact (aka Black Swan blindness).

Self belief – Large organisations are rarely laid low by competitors, but hubris for does for them time and again. Equipped with lobbying firms and PR agents a management mindset develops believing that hearts and minds can be won at any cost. With power comes a high degree of self belief, a sense of arrogance leading to delusions of invincibility. Global firms are feted by politicians for employment they bring to a region; yet politicians are fickle and mindful of swings in public mood. Most incidents can be controlled but with power comes distortion of perspective. What large organisations forget is that the public, politicians and media ultimately judge them on actions not their words. Both Toyota and BP are so large that no problem is seen as intractable, until ratings agency down grade the stock value and investors exit in droves. The ‘we-can-fix-it’ mentality is laudable but often misplaced.

Corporate culture needs to be alert to incidents with the potential to damage reputation, in this way the drama need not become a crisis.