Reputation Risk

A business’ reputation affects its success in so many ways. Employees want to work for a company that has a great reputation just as people want to buy from one. The best companies understand their reputations are among their most valuable assets.

In 1982, Johnson and Johnson removed all Tylenol products from shelves when it discovered its containers had been tampered with. Their short-term losses were vast, both in terms of lost profits and packaging redesigns, but long term, Johnson and Johnson remains one of the most respected companies around.

Penn State was considered one of the best universities in the country until sexual abuse charges against Jerry Sandusky were leaked and it appeared that the university had covered up the wrong doing. Penn State’s reputation took a large hit, and criticism continues to this day.

Finally, there is Target, which did not do enough to prevent millions of its customers’ personal data from being compromised and then tried to minimize the extent of the damage. Both sales and stock prices have plummeted because of management’s disingenuous response to the situation.

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All three of these examples involve companies that were faced with serious crisis. In the case of Johnson and Johnson, the company admitted the problem and took prompt corrective action. In stark contrast, Penn State and Target both tried to minimize the problem and only took action when there was no other choice.

In hindsight, I think both Penn State and Target would do things differently if they were given an opportunity to do damage control all over again. The natural inclination is to proclaim innocence and hunker down, but this strategy just is not effective and is a long-term drag.

Too many times I see firms in crisis responding to the PR issues when the real problem is a business issue. In the case of Target, they should have been concerned with how they were going to protect their customers from further damage, not PR. They still have not really done that effectively.

My credit card information was stolen during the Target breach, and my credit union—like so many other financial institutions—did a great job preventing any further theft by deactivating my cards and reissuing new ones. For me, Target’s reputation has been irreparably damaged by the way they handled this incident, and I will never shop there again because of it. I just do not trust them.

Reputation risk is always around us and now, with the web, there are so many places your reputation can become sullied. Take, for example, Amazon, where testimonials are so important in the buying decision. A self-proclaimed Amazon junkie, I admit using other buyers’ evaluations to help me select the right product. I have found them to be incredibly accurate.

With the threat of so many potential reputation risks, the most effective thing you can do is try to figure out where your business is vulnerable and develop a sound strategy for dealing with exposure. Reputation risk insurance is not that expensive and can help you manage crises and handle PR.

Now go out and develop a plan to deal with any reputation challenge you might encounter in the future. This is just plain good business.