Reputation Ratings: The Need for a Strategic Approach
2003 Issue No. 4
As acceptance of the importance of corporate reputation has grown, numerous broad-based reputation rating systems have emerged. Whilst such systems are growing in their sophistication, none yet provides companies with the information needed to make strategic decisions about reputation. JANAK MAYER examines some of the current crop of reputation rating systems, and contrasts them against Futureye’s own approach to reputation measurement.
The importance of reputation as a vital corporate asset has never been more widely recognised than it is today. Only a decade has passed since the awakenings of the early-to-mid 1990s, when controversies such as Ok Tedi, the Brent Spar, and the execution of Ken Sarowiwa, gave companies like Shell and BHP an abrupt wake-up call to the damage that angry stakeholders could inflict upon them. But today the corporate landscape has changed profoundly.
Programs such as the Global Corporate Citizenship Initiative – to which almost all of the multinational corporate participants in this year’s World Economic Forum signed up – attest to just how seriously issues of reputation, and the task of regaining public trust, are now taken in the corporate sector. As reputation has become the new ‘buzzword’, so have a host of different rating and ranking systems sprung up around the world, aiming to rate companies’ social responsibility performance, or assess their reputations.
In the US, specialist instruments such as the Reputation Quotient, developed by New York University’s Charles Fombrun, compete with a range of more mainstream approaches to reputation measurement, including the Fortune Most Admired Corporations ranking. Leading the charge in Australia is the newly established RepuTex ratings system, which takes a bold stride towards an ambitious goal – the establishment of rating system for organisations social responsibility equivalent to a Moody’s or a Standard and Poor’s credit rating.
But what exactly is reputation? And what are the best ways of measuring it? Despite the newfound prevalence of reputation measurement tools, there is surprisingly little agreement on even such basic questions.
Steven Wartick, professor of management and policy at the University of Northern Iowa, suggests that many efforts to measure reputation are misguided, because they fail to start with a clear definition of what reputation is, relying instead on muddled concepts such as identity, image, prestige, goodwill, esteem and standing.
A case study in ‘muddled’ understandings of reputation is the Fortune Most Admired Companies (MAC) survey, which purports to provide vital insight into corporate reputations, including an analysis of the “top drivers of reputation for each industry”. When one examines the ‘key aspects of reputation’ that the survey aims to measure, however, it swiftly becomes apparent that the focus is on fairly standard business metrics, such as ‘quality of products’ and ‘long-term investment value’. Whilst ‘social responsibility’ is included as one of the key reputation attributes, there is little evidence of serious thought about what social responsibility entails, or how it is best measured. This fact is best indicated by the survey’s greatest failing: in an exercise focussed on reputation, the only respondents targeted are business figures such as senior executives, directors, and financial analysts. A broader circle of stakeholder opinions – that many would suggest form the most crucial components of corporate reputation – are entirely excluded.
If lack of an accurate, widely understood definition of reputation is one of the barriers to effective reputation measurement systems, what might a workable definition of reputation entail? Charles Fornbrum, of the Stern School of Business, New York University, defines reputation as “a perceptual representation of a company’s past actions and future prospects that describes the firm’s overall appeal to all of its key constituents when compared with other leading rivals”
Adding a subtle, but important distinction to a similar theme, Steven Wartick suggests reputation is “the aggregation of a single stakeholder’s perceptions of how well organisational responses are meeting the demands and expectations of many organisational stakeholders”.
Better than most, Wartick’s definition seems to encompass the key attributes of reputation. In particular, it is useful in two key regards: it emphasises reputation as an aggregation of individual stakeholder perceptions, and it stresses that individual stakeholders’ assessments of reputation depend not only on how their own expectations are met, but how they see a firm responding to the demands and expectations of others – including activists, NGOs, and other organisational critics.
In this regard, the new Australian RepuTex reputation rating system goes far further than many efforts to measure reputation, by endeavouring to include, in its fundamental inputs, the voices that are traditionally highly critical of the social and environmental impacts of big business. Ratings under the RepTex system are made by a committee of experts, chaired by John Hewson, former Opposition Leader and current Dean of the Graduate School of Management at Sydney’s Macquarie University. Advising the committee are a range of ‘category based research groups’, in the fields of corporate governance, environmental impact, workplace practices, and social impact. These groups, which include key activist and community sector organisations like the Wilderness Society, Greenpeace and ACOSS, along with experts from industrial and professional associations, academe and government, examine both public domain information, and survey responses provided by companies.
Whilst this methodology offers the RepuTex system some significant, and largely unique strengths, it also entails some substantial downfalls. In its favour, it goes beyond simple market research approaches, and endeavours to incorporate a significant degree of advice, analysis and feedback from groups traditionally highly critical of the social and environmental impacts of big business.
For Futureye, this differentiation is a crucial factor behind the way we conduct our own reputation measurement exercises. Market research, as a tool, has some very useful applications, but it is not well suited to the task of understanding reputation issues. Market research is generally aimed at evaluating the perceptions of a sample of participants that is representative of the general public, or of a particular target market. It usually aims at a degree of statistical accuracy, and specialises in examining existing attitudes and opinions, unprompted by additional influencing information. As such, it essentially provides a lag indicator of already emerged issues and trends.
Reputations, however, are made and lost not primarily through the perceptions of the general public, but through the opinions of the most highly involved of an organisation’s stakeholders. It is amongst this group, and in particular amongst an organisation’s critics – the activist groups that oppose a company, the journalists that consistently campaign against them through the press, the local communities that complain about their activities - that the most useful sources of intelligence in assessing corporate reputation can be discovered. Taking action on reputation issues only after awareness of them has reached a representative population sample is a recipe for disaster - as Nike found out when a marketing study of 13 to 20 year olds were asked what they associated the Nike brand with, and the third highest response, after ‘cool’ and ‘sport’ was ‘exploitative labour practices’.
More than that, reputation, following Wartick’s definition, in fact exists primarily – perhaps even exclusively – in the perceptions of stakeholders – and particularly the highly involved. If reputation is “the aggregation of a single stakeholder’s perceptions of how well organisational responses are meeting the demands and expectations of many organisational stakeholders”, then what is important to measure is not the knowledge and expectations of the general public, or even a group of business decision makers. Most important are an organisations highly involved stakeholders, as the responses of this group are important not only in their own right, but also in their ability to influence others. As Wartick’s definition highlights, less involved stakeholders frequently draw their conclusions on reputation not in regard to how their own expectations are met, but how the demands and expectations of other organisational stakeholders – the highly involved – are met.
Understanding the demands and expectations of highly involved stakeholders is thus critical to an assessment of corporate reputation that aims to provide any measure of strategic intelligence on reputation. For this reason, reputation measurement exercises undertaken by Futureye focus on detailed engagement with a company’s most highly involved stakeholders, including its most ardent critics, to develop a rigorous understanding of the full range of issues and views which might have the potential to become major reputation issues in the future (See box 2 – Futureye Reputation Measurement).
This variety of strategic, risk-oriented approach to reputation measurement, however, is difficult to reconcile with the requirements of a uniform, standardised ratings scheme, as the compromises involved in the RepuTex ratings methodology demonstrate. The downfalls of the RepuTex methodology are significant, and stem largely from one key, irreconcilable tension. Broadly speaking, it may be phrased simply as follows: If reputation is the aggregate of individual stakeholder perceptions, and each organisation has a unique set of stakeholders, how is it possible to create a standardised methodology to assess the reputations of an entire index of companies?
The short answer, of course, is that it isn’t. Any attempt to use a common pool of ‘stakeholders’ to rate 100 different companies is bound to result in a compromise that will be criticised by many. And ‘criticism’ seems like an understatement when one examines the depth and bredth of attacks which have been brought against the RepuTex methodology (see Box 1 – RepuTex Under Fire). In this case, however, the critics have been unduly harsh. As an inaugural exercise, RepuTex has done an impressive job - it is on many fronts a more sophisticated attempt to measure social responsibility performance than has been conducted until now. Its aspiration to become the ‘credit-rating equivalent’ of the CSR world is admirable in its ambition, and as the standard evolves and improves through feedback and refinement, it may indeed become a powerful yardstick by which to measure companies comparative social and environmental performance.
By their very nature, however, standards such as these will never be able to substitute for more individualised approaches to stakeholder engagement and reputation measurement. Companies that seek to take a strategic approach to reputation need to rely on far more than just a broad-brush assessment of how they perform against their peers – they need to undertake detailed consultation and engagement with all of their important, involved stakeholders, and develop appropriate metrics for tracking their own performance on critical issues. Universal reputation and social responsibility ratings system are an interesting, and potentially very important development. But they remain an after-the-fact indicator of a reputation well (or poorly) managed. For those seeking to make strategic decisions to build or protect corporate reputations, a far finer set of tools is needed.
BOX 1 –RepuTex Under Fire
For a rating system only released this year, RepuTex has attracted an extraordinary degree of criticism. Ironically for its detractors, the attention generated by the minor furore of attacks and debate it has spurred may well have given the system the degree of publicity required for its ongoing success.
The battle started early in the year, with the chair of the RepuTex rating committee, John Hewson, was drawn into a public punch-up with Telstra and Caltex over RepuTex’s requests for cooperation. Caltex chairman Dick Warburton accused Hewson of “some of the most incredible negative blackmailing I have seen”. Along with numerous other companies, Caltex and Telstra declined to give input into the study, and were instead assessed purely on the basis of information available in the public domain.
Since the release of the RepuTex ratings, the barrage of critics has only increased. Leading the front line of the assault has been the Institute for Public Affairs, with Mike Nahan and Gary Johns both seemingly using every column-inch and minute of airtime available to them to attack the survey, and demonstrate why it was another example of unaccountable NGOs holding the world to ransom (a favourite theme of the IPA currently, and a personal obsession for Johns himself). This, they claimed, was another dangerous example of the ability of NGOs to use a process “clothed in the appearance of independence and rigour” to push an unaccountable and unrepresentative anti-corporate agenda.
Thus was created a situation in which Johns, a former Keating government minister, was running an almost Milton-Friedman-esque line on corporate social responsibility, attacking John Hewson, the newly found champion of NGOs and ethical business practices. The truly beautiful irony of this situation was not lost on many observers.
Others too have weighed into the fray against RepuTex, including Peter Hendy, CEO of the Australian Chamber of Commerce and Industry. Hendy’s comments have been more reasonable than those from the IPA, but they echo fundamentally similar themes. Hendy describes the ratings methodology as rivalling ‘the subjective emotionalism of the voting system for Australian Idol’, again criticising the involvement of NGOs and groups like the ACTU, as well as levelling more informed criticism at the methods of the ratings group in assessing companies that did not cooperate by voluntarily providing information.
Box 2: Futureye Reputation Measurement
Futureye conducts strategic stakeholder engagement and reputation measurement exercises for a range of organisations. Below are a handful of the issues we consider with clients when undertaking an engagement process to measure reputation:
Who do you include?
Your strongest critics
Many organisations are reluctant to gauge their reputation against the responses of their most ardent critics, but in many ways, these are the most important stakeholders to engage. They present the greatest source of reputation risk, should their views gain acceptance amongst a wider audience, and thus provide intelligence you cannot afford to ignore.
All your highly involved stakeholders
You may need to cast your net more broadly than originally anticipated if you want to capture the full range of relevant perceptions that may have the potential to impact on your reputation. Consider local community members in the areas you operate, the different components of your supply and distribution chains, shareholders, consumers, NGOs and activists, media, government and regulatory authorities, professional associations and industry bodies… and many more.
Your Staff
Employees are not always considered as relevant stakeholders in undertaking reputation audit activities. They shouldn’t however, be overlooked – they can provide valuable information, and bring up a wide range of internal issues and perceptions . Just like your highly involved critics, your staff may know about key issues, which, unchecked, have the potential to cause you significant damage.
What do you measure?
Don’t assume that you know the key issues that drive your reputation are. There may be many factors your stakeholders care about that haven’t even appeared on your radar screen… yet. Before undertaking any sort of quantitative evaluation amongst your stakeholders of your performance, you may want to undertake a qualitative exercise, to find out what the key areas that really drive your reputation are. That way you can be sure you are measuring the right things.
Taking a strategic approach
The most valuable information on stakeholder perceptions goes way beyond just ‘finding out what people think’. In the course of an engagement exercise, many highly controversial issues may arise – particularly when you engage your critics. Consulting with no real intention to act, and no ability to tell those being consulted what impact their comments may have, can often be worse than not consulting at all – a phenomenon sometimes referred to as ‘insulting consulting’. Make sure that those who are conducting the engagement exercise are primed, and to the best of their ability and yours, know what some of the contentious issues are that are likely to come up. Explore some of the boundaries before you go out – what are people likely to want you to change, that you know you cannot? What strategies might you be able to use to address these concerns instead? Once you have begun to think about some of these issues, you can start to use your engagement exercise for genuinely strategic purposes – testing not only for perceptions about current and emerging issues, but also examining how people react to your proposed strategies for dealing with them.