Reputation as an asset: how boards should govern it

Most boards will agree that reputation matters. Far fewer can say who in the company is responsible for it, how it is measured and when it was last the subject of a decision rather than merely a discussion. That is a paradox: an asset on which the trust of customers, banks, employees and regulators depends is often managed by instinct, and draws the board's attention only when something goes wrong.

Reputation is neither image nor brand. Image is what a company says about itself. A brand is a promise made to customers. Reputation is the sum of the judgements that different stakeholder groups make about a company on the basis of what it actually does. That is why it cannot be built through communications alone, although without communications it is very easy to lose.

Why reputation is a business asset

Reputation works as a store of trust. When it is strong, a company finds it easier to deal with its bank, closes negotiations with counterparties more quickly, attracts better candidates and meets with more understanding when it makes a mistake. When it is weak, each of these processes becomes slower and more expensive.

Like other assets, reputation wears down over time. Building it once is not enough. It requires continuous investment, and its value can fall sharply as a result of a single event. Unlike machinery or property, however, it cannot simply be bought back. Rebuilding trust usually takes far longer than losing it.

Who owns reputation

The answer "everyone" is true, but in practice it means no one. Reputation should have an owner on the management board, most often the chief executive, who is accountable for it to the supervisory board or the shareholders. In this arrangement the communications function is adviser and executor, not the sole party responsible.

Good practice is to bring reputational risk into the company's risk management system. That means regularly reviewing events that could undermine stakeholder trust: from product quality problems, through employment disputes, to the conduct of suppliers or statements made by board members. Each such risk should have an assessment, an owner and a mitigation plan.

Reputation is too valuable to be dealt with only when it becomes a problem.

Reputation also needs to be considered in strategic decisions. A restructuring, an acquisition, a price change, entry into a new market or the choice of a business partner all have reputational consequences. A board that examines them while the decision is being taken, rather than only when it is announced, avoids many unnecessary costs. A simple question asked of every such decision is enough: how will it be judged by those whose trust we depend on?

Measuring what is hard to measure

Reputation cannot be reduced to a single indicator, but it can be tracked in a structured way. The key is to measure it separately for the most important stakeholder groups, because customers, employees, banks and the local community judge a company by different criteria.

In practice a combination of sources works well: opinion research among customers and employees, analysis of the company's presence in the media and online, conversations with key partners, and indirect indicators such as staff turnover, the number of complaints or the terms of financing. None of these sources gives the full picture, but together they show the direction of travel.

Regularity matters more than precision. Measurement carried out periodically, using the same method, gives the board more than a one-off, elaborate study whose results have nothing to be compared with. It matters just as much that the results reach the board meeting rather than ending up in a drawer in the marketing department.

The governance minimum

1. A named board member responsible for reputation.
2. Reputational risk in the risk register, with assessments and owners.
3. A map of key stakeholders and their expectations.
4. Regular, comparable measurement of reputation in selected groups.
5. A review of reputation at a board meeting at least once a quarter.
6. An assessment of reputational impact for every significant strategic decision.

Companies that treat reputation as an asset are not immune to crises. They do, however, have two advantages: they spot warning signs earlier, and they hold a reserve of trust that allows them to come through a difficult period without lasting damage. Both are the result of decisions taken long before they are needed.

If you would like to bring more structure to the way your company manages its reputation, or to discuss a specific risk, we would welcome a confidential conversation with the TORRE team.