Companies have made sporadic attempts to put reputation on the management agenda in the past–mostly in response to corporate crises–but the lessons learned were temporary.
In 1991, for example, regulators discovered that Salomon Brothers had failed to curb the activities of a trader who was buying up large amounts of Treasury bonds in an attempt to corner the market, recalls Charles Fombrun, executive director of the Reputation Institute and a former professor at New York University's Stern School of Business. The resulting scandal claimed the head of Salomon's then-CEO, John Gutfreund. His replacement, on a transitional basis, was Warren Buffett.
"The first thing he said to the bank's traders was: 'If you lose money for the firm, I will be understanding. If you lose reputation for the firm, I will be ruthless,'" says Fombrun. "It was a famous statement because it recognised that reputation is something long-term and fundamental, while money is transitory."
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As part of the firm's response, the incentive structure behind the Salomon traders' compensation was revamped so that pay was better aligned to the company's long-term interests. The traders simply went to work elsewhere, and Salomon was forced into a humiliating retreat. Less than a decade passed before Citigroup's corporate and investment banking unit–into which Salomon had been subsumed–ran into a fresh series of scandals.
Another example is Anglo-Dutch oil giant the Royal Dutch/Shell Group of Companies, which is currently trying to emerge from under a cloud caused by the deliberate exaggeration of its proven oil reserves. Prior to this scandal, notes Fombrun, the company had been regarded as a pioneer of reputational risk management.
STICKING TO PRINCIPLES
Shell decided on a new approach to reputation after being caught in two scandals during 1995, he says. In one, the company's decision to sink the Brent Spar–a North Sea oil platform that had reached the end of its useful life–created a storm of protest that eventually forced the company to dispose of the platform on land, even though Shell's decision to sink the platform had been supported by the U.K. government from the start.
In the second scandal, Shell was accused of supporting the Nigerian military dictatorship of Sani Abacha, after indigenous tribes tried to disrupt the company's operations, arguing that they were not getting a fair share of the country's oil profits. The dispute boiled over into the international press when nine protestors were executed by Abacha's regime. "The trouble in Nigeria happened in parallel with the Brent Spar problems," says Fombrun. In the aftermath, Shell began to behave differently as a company, he says. It drew up a series of strictly enforced ethical and environmental principles and also began engaging in dialogue with stakeholder groups in an attempt to catch potentially damaging issues before they emerged.
Fombrun, who advised Shell when it was coming through this reputational crisis, says that the company's new problems "have destroyed a strong reputational culture. When you talk to people at Shell now, there's a huge sense of depression at the way the company has slipped up."
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