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Perception versus reality: the reputational risk gap

In an ideal world, reputation would be a mirror held up to reality, reflecting the truth of an organisation’s operations and interactions. There is a school of thought that this is in fact the case: that reputational risk isn’t its own risk category, but rather the outcome of other risks. A poor reputation, therefore, is the result of poor corporate behaviour: if you don’t run your business properly, then you incite reputational risk.

But reputational risk is far more nuanced than this. Reputation has far more grounding in perception than in reality – perceptions held by the various stakeholders linked to an organisation –and is not necessarily the truth of that organisation. How others see it can have a far greater impact than what it does, when it comes to forming that reputation.

Unfortunately, such perceptions need not be founded in truth: they could be rooted in a simple accounting error. Stock prices could plunge thanks an extra zero or decimal point on a balance sheet – a ‘fat finger error’. Or a less simple accounting slip, such as the $4bn overestimation of profits by Bank of America in April 2019.

In this age of hyper-connectivity and media anarchy, where new communication networks arise daily, social media provides a forum for the critical and can grossly distort the facts. Companies could find themselves unfairly targeted – either ignorantly or maliciously – for alleged crimes, sparking an online witch hunt when their only misdeed might be having a name a bit too similar to another, less ethical company; being the victim of a disgruntled ex-employee with an axe to grind; or being the focus of an attack by a celebrity with major media clout.

The latter two shocks combined for the MAC cosmetics brand when former MAC model Pamela Anderson publicly slammed the company, which had for years purported to eschew animal testing, over imports to China which had been tested on animals. Parent company Estée Lauder argued that it was the law in China and the Chinese deserved their make-up: Anderson that they should cease exports to the country.

The reputational gap can be dangerous, whether your reputation is better than your practices, as in the case of MAC, or worse. The failure of a firm to ‘walk the talk’, and attempting to whitewash its image, will eventually lead to a greater decline in reputation than might have happened had it been more upfront. Despite aggressively pushing its renewable fuel agenda, BP’s carefully wrought image as a company with a conscience was eaten away by a series of shocks, including a fatal refinery disaster in Texas City in 2005, a pipeline leak in Alaska in 2006, and the Deepwater Horizon rig explosion in 2010. The gap between how it was presenting itself and the perceived reality of its operations formed by these incidents exacerbated the impact on its reputation.

The aim, therefore, should be to close this gap between reputation and reality, to avoid hits from the latter damaging the former. If character exceeds reputation, the focus should be on improving it through targeted, factual media stories directed at primary stakeholders, with factual quotes and supporting data to underline the point, avoiding puff pieces at all costs. By contrast, if reputation outstrips reality, the aim should be to catch up before being caught out – improving corporate behaviour, responsibility, performance in the areas most important to stakeholders.

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