Sunday, February 28, 2021

The Big Picture

Reputational Risk in an Era of Extremism

President Biden’s decision to make one of his first acts in office the blocking of construction of the Keystone Pipeline, even after its owners agreed to reduce carbon emissions, invest in alternative energy, and create union jobs, should stand as a warning to every company concerned about whether their reputations can withstand a sharp changing of the political tides.

Keystone didn’t merely lose the left – for whom it had become a prime target and whose expectations it could never meet – it allowed its reputation to be eroded among moderates as well, so that when its owners, TC Energy Corp., offered its 11th hour concessions, they seemed inauthentic.

It failed earlier on to distinguish between stakeholders with extreme points of view and those with moderate ones and to engage those moderate stakeholders to manage and meet their expectations.

With the shift of power in Washington, companies in many highly scrutinized industries—ranging from banking to social media to energy to charter schools to pharmaceuticals—are going to come into the crosshairs of newly powerful advocacy groups and politicians with a particular agenda.

Ironically, the same forces that ultimately drove a mob to Capitol Hill – alienation and generalized public anger, combined with the weaponization of social media – can be marshalled by extremists on the other side of the political spectrum as well and, given the way the political winds are now blowing, it seems clear that corporate America will be a target.

We have already seen the reaction by Senator Elizabeth Warren and others to the 200 CEOs who signed a Business Roundtable pledge in 2019, elevating the standing of their communities, employees and the environment. She called it an “empty publicity stunt.” So did a respected Harvard Business School professor, arguing that many CEOs had signed without buy-in from their boards. Whether they represent a widespread movement of anti-business sentiment or a fringe element remains to be seen, but every business ought to be considering the potential influence these voices could have. And marketing won’t make it go away.

We have also recently seen banks shunning business relationships with fossil fuel companies and a stunning race by companies for higher ESG ratings (Environment, Sustainability, Governance) as a way of attracting ESG investors and, presumably, gaining goodwill among environmentalists. In many cases, it’s unclear whether their statements and actions are merely aspirational or truly have the operational and governance support they need to succeed. If the former, they are raising the expectations of all their stakeholders’ expectations to levels they may be unprepared to meet – and that failure can easily lead to reputational crises.

What do companies need to do? Our firm has been analyzing corporate reputations, advising on risk management strategies, and underwriting reputational risk for more than a decade. There are several key factors companies need to recognize.

First, to emphasize a point that cannot be overstressed, companies need to understand that reputational strength and resilience are not the products of marketing. They are measured by the degree to which stakeholders’ expectations are aligned with a company’s actual performance. Reputational crises occur when significant numbers of stakeholders are disappointed or angry and their reactions cause tangible, economic damage.

Second, reputational strength requires continual intelligence gathering, especially in times of political change. Are new stakeholders emerging? Are their expectations changing? How do different segments differ in their expectations? Where are the influencers? How well positioned is the company to meet each segment’s expectations and what are the risks – and costs – of failure? What exposure do boards have, given the dramatic recent rise in shareholder derivate lawsuits citing reputational damage as a cause of action?

Perhaps most important is recognizing the potential power of extremists to drive their agenda through social media and political influence. Some corporate leaders may be tempted to dismiss extremists – after all, it is probably impossible to win them over, whatever their specific positions or expectations. Others may go in the opposite direction, seeking to placate them and gain their support. Both strategies are flawed.

It is difficult to imagine the most ardent environmentalists ever supporting the Keystone Pipeline under any circumstances. However, it is not difficult to imagine union households, moderate politicians, and others potentially being willing to balance real, tangible jobs against potential environmental hazards, especially if the company had proposed environmental concessions and investments earlier on along with a credible plan for achieving them.

That is why intelligence gathering is so essential to 21st Century Enterprise Risk Management. Companies need to understand the nuanced differences among stakeholders and their expectations. They need to take tangible steps to demonstrate that they are committed to meeting reasonable, achievable expectations and seek validation from credible third parties whose seal of approval will be meaningful to moderates. Other validation could come from insurance products and strategies that essentially have credible, objective third parties warrantying the effectiveness of operational and governance processes.

Companies should also embrace objective, quantifiable measures of their performance – as opposed to the somewhat murky ESG rating models that currently exist. They should be pleased, for example, by a rule recently proposed by the Office of the Comptroller of the Currency, which would block banks from denying their products or services to companies simply because they deem them unpopular at the moment, and by a proposal that has been floated for the SEC to require standardized reporting of ESG activities and risks.

The lesson to be learned from the Keystone Pipeline, and other reputational crises born of cultural and political forces, is that companies need processes in place that continually monitor and address stakeholder expectations as they emerge, rather than avoiding, delaying or hoping to ride them out. Companies need to establish credibility through the use of third-party validation and objective, quantifiable objectives and milestones. And they must differentiate between the costs associated with missing the expectations of extremists and the far greater costs associated with missing the expectations of the moderate masses.

While the loudest voices may be worth listening to, understanding the real expectations of more moderate ones – and meeting them – is the real key to reputational resilience and growth.

Written by Dr. Nir Kossovsky. Have you read?
World’s Best Countries to Headquarter Multinational Corporations (MNCs).
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Dr. Nir Kossovsky
Dr. Nir Kossovsky, CEO of Steel City Re, is an authority on business process risk and reputational value. He has been an industry-wide leader in the development of indexed measures of reputational value and actuarily sound underwriting methods that deter reputational attacks, and protect companies and their leadership. He holds more than a dozen patents, including an algorithmic reputational value measurement system currently enabling insurance solutions, third party investment strategies and governance products. He has written hundreds of articles and four books, including “Reputation, Stock Price and You,” Apress 2012). He has degrees in philosophy, business, and medicine, served as a Captain in the US Navy Reserves, and early in his career was a tenured faculty member at UCLA. Dr. Nir Kossovsky is an opinion columnist for the CEOWORLD magazine. Follow him on LinkedIn.