Bad Reputation

Bad Reputation

Can PR fix the problem? Probably not.

By Dick Martin

Bad Reputation

 

Dick Martin is the author of, most recently, OtherWise: The Wisdom You Need to Succeed in a Diverse and Divisive World. Previously, he spent thirty-two years with AT&T, including five as executive VP of PR, employee communications, and brand management. His most recent article for the magazine was “Nothing in Common,” in the Summer 2012 issue. He can be reached via This email address is being protected from spambots. You need JavaScript enabled to view it. .

CEOs implicitly understand the truth of Warren Buffett’s maxim, “It takes twenty years to build a reputation and five minutes to ruin it.” But only recently have they begun to acknowledge its impact. Since 2009, for example, Goldman Sachs’ 10-K filings have elevated “reputational risk” to the very first sentence of the twelve-page litany of “risk factors” the company faces. It’s still there, in plain, don’t-say-we-didn’t-warn-you language, along with seemingly everything else that can go wrong, from competitive pressures and market volatility to the inherent fallibility of its own systems and processes.

When that language first appeared, corporate-governance experts told The Wall Street Journal they couldn’t recall any other company citing bad publicity as a risk to its business. That may be because few companies had experienced such an unrelenting bout of toxic media coverage. Goldman Sachs was not only roundly accused of helping cause the Great Recession of 2007-09—it was pilloried for profiting from it. Rolling Stone called the company a “great vampire squid wrapped around the face of humanity.”

Was Goldman Sachs finally disassociating itself from William Henry Vanderbilt’s sentiment that “the public be damned”? Or was it merely yielding to the obvious?

In fact, the firm had long included “reputational risk” in its 10-K reports. But its 2009 filing suggested that it was taking the threat more seriously; that notion was reinforced when the company hired high-powered outside PR counsel and replaced its chief spokesperson. Unfortunately, Goldman—like many companies—drew the wrong conclusion from its experience as a corporate piñata. Its 10-K filings and its subsequent actions reduced reputational risk to two words: bad publicity. “We may be adversely affected by . . . negative publicity . . . regardless of the factual basis for the assertions being made,” it griped.

Now, there’s no question that negative publicity can lead to unwanted attention from the government, not to mention the tort bar. It can undermine employee morale and make customers skittish. It can sink sales, wreck careers, and move markets.

But the solution is not to turn up the PR wind machine to blow away bad publicity. So-called “headline risk” is a self-serving cop-out. Negative publicity is not sui generis but the product of other risks. Damage to a company’s reputation is the risk of other risks. It can’t be managed directly. The key to managing bad press—and reputational damage—is to pay attention to the decisions, behavior, and events from which it flows.

When I joined AT&T, I was told there were two ways to become an executive. The first was to work hard, ring up a series of accomplishments in successively more difficult assignments, and eventually I’d be promoted to the executive ranks. The other way was to get in serious trouble. The resulting newspaper headlines would almost certainly identify me as “an AT&T executive.”

That turned out to be wise advice. And I heard it repeated in different ways throughout my career. Every executive knew that the company’s prominence earned it outsized attention. When I attended board meetings as a senior manager, I often heard directors wonder out loud how the major media would characterize one or another proposed course of action.

But I never heard anyone suggest there might be a way to spin it to make it more palatable or appear to be something it wasn’t. And the one time our CEO couldn’t be talked out of presenting a major change in strategy as “the next logical step in the company’s evolution,” he was widely pilloried. As I was—and deservedly so.

My experience at AT&T taught me that reputational risk is real. It also taught me that the best approach to managing it is a full commitment to transparency and collaboration, both within the company and with outside stakeholders.

The practice of media relations was long based on a belief that the business press is critical in reaching audiences who matter to a company. Social media completely upends that convention, for good and for ill: On the one hand, companies can now reach their customers directly and easily; at the same time, customers can reach each other, without a company’s involvement. The channels through which people can learn about a company have multiplied so dramatically that the only option is to treat the people and communities that contribute to a company’s success—and bear the risk of its failures—as full partners.

Procter & Gamble is one of the world’s savviest companies. Just as it was a leader in the advertising techniques of the twentieth century, it has pioneered in the new technologies of the twenty-first, including social media. But even P&G can drop the ball.

Thanks to its invention of disposable diapers in 1963, P&G sells more baby products ($10 billion) than any other company in the world. In fact, Pampers accounts for more than 10 percent of its revenue, and the company has invested millions in research and development to maintain leadership in the category. For decades, the company’s diaper scientists were obsessed with one thing—dry bottoms.

In 2010, the diaper lab came up with what the marketing people called “the biggest innovation for the Pampers brand in the last 25 years.” The company’s diaper scientists figured out how to print absorbent gel onto the diaper rather than pouring it into a bulky pulp material. That made the diaper 20 percent thinner and used less material. But it would take three months to get new packaging into full distribution, so the company started putting the new Pampers into old packaging and prepared for a big launch later in the year.

Some mothers immediately noticed that the diapers seemed thinner. Since 2.5 million babies develop diaper rash every day, it was inevitable that some of the babies put in the thinner diapers would get red bottoms. And it was just as predictable that their mothers would blame the reengineered diapers. They started a Facebook page to detail what they claimed were “chemical burns” and to press P&G to bring back the old Pampers. Their claims quickly attracted the media’s attention, as well as the plaintiffs’ bar, and ultimately led to a dozen lawsuits and inquiries by product-safety regulators in the U.S. and Canada. When the company settled the case in 2011, it was on the hook for about $3 million ($2.73 million of which went to plaintiff attorneys).

The great irony of this situation is that Pampers had its own Facebook page with 1.4 million likes, far more than the opponents of the new diapers ever attracted. The company could have announced the new diapers there even before they went into distribution, preparing their customers for the “new and improved” version. It could have interviewed its employees, many of whom had used the new diapers on their own children, and posted the videos to YouTube and on its existing Pampers Village forum. It could have documented the extensive testing the new design went through. And it could have done more to educate its customers on the real causes of diaper rash, which ended up as one of the requirements of its settlement.

But P&G did none of this, because it considered its customers an “audience” for its product announcement rather than a community of users who have a stake in its products. That may be the biggest change social media has wrought. Traditional media relations sought to deliver a message to an audience. Twitter and Facebook give a company the opportunity to participate in a community that is the ultimate source of its credibility.

You can’t build an online community. You can only seek permission to join one. You can give it a place to meet, as P&G did, but you’ll never own it, as P&G also learned. The trick is to become a full participant, listening to the chatter, encouraging discussion, and acting on feedback. Above all, recognize that social media is about customers helping each other. When big changes are in the offing, a company owes it to the community to involve them from the earliest practical point.

That’s what Domino’s Pizza did. Domino’s was founded in 1960, around the same time Pampers hit the shelves for the first time. But unlike P&G, Domino’s stuck with the same recipe for fifty years. By 2010, focus groups were describing its pizzas as basically “ketchup on cardboard.” In a national survey of consumer taste preferences, Domino's was last of all national chains—tied with Chuck E. Cheese. Store cash registers reflected the survey results—sales had been declining for more than three years.

Instead of blaming flawed research, Domino's took the radical step of changing its pizza recipe. And instead of waiting to announce a “new and improved” product, the company decided to own up to its shortcomings and to involve its customers in its pizza’s reformulation. The old recipe went into the dumpster. Butter, garlic, and parsley went into a new crust. The cheese was shredded instead of diced and now included a hint of provolone along with mozzarella. The sauce was sweeter and had a red-pepper kick.

Domino’s reached out to food bloggers and others who had criticized the brand and asked them to comment about the new recipe on the company website. It launched a website that documents the whole reformulation and is still up three years later. And for a dash of street cred, it encouraged people who liked the new pizza to tweet their endorsements.

The results? Stephen Colbert devoted an entire segment to the new pizza (which, admittedly, mostly poked fun at the company’s acknowledgment of the flaws in its old recipe), and TV news shows conducted their own on-air taste tests. More importantly, sales increased 14 percent just months after the new pizza’s introduction; the company’s stock price shot up 50 percent.

Goldman Sachs was right to point out the importance of a good reputation. But defining those risks as the product of “bad publicity” misses the point. Reputation is a meta-concept—it’s what people think other people think. Someone’s direct experience with a company is expressed in various levels of satisfaction. But it isn’t sewn into the fabric of the company’s reputation until it becomes secondhand knowledge. The new and old media undoubtedly play a big role in spreading second multiple-handed “knowledge” about a company. But somewhere in that chain of hearsay was an actual event.

In terms of reputational risk, what matters are a company’s actions, whether planned or in reaction to events over which they have no control. That’s why reputation management is not a job for the PR department. The most compelling communications can’t substitute for operational action, and no one can spin fast enough to relieve line managers of their risk ownership. But that doesn’t mean PR people are impotent wordsmiths. Good PR counsel can help line managers find their way through the thicket of reputational issues embedded in their functions and operations.

In risk assessment, PR counsel can help operational managers identify the stakeholders most closely affected by different categories of risk, such as the employees and communities that might be affected by an environmental problem. PR counsel can help line managers consider the full scope of risks that might initially seem to have only local impact, such as labor problems at a contract factory in a far-off land. PR counsel can help operating management understand the changing expectations of stakeholders. It can help assess gaps between those expectations and the company’s current performance. And it can help prepare a response plan, ensuring that timely communications back up corrective actions. There’s another benefit to integrating public relations (or, as they are sometimes known, “communications”) people into a firm’s risk-management processes. It grounds them in the reality of a company’s business. The urge to present the company aspirationally—as we wish it were, rather than as it really is—runs the danger of creating a gap between reality and reputation, exposing the company to even larger risk. British Petroleum, for example, made a big deal of its metamorphosis from oil company to environmentally conscious energy company in everything from its advertising to its corporate identity. But “Beyond Petroleum” degenerated into “Beyond Belief” following a long series of pipeline and factory accidents, capped by the Deepwater Horizon disaster in the Gulf of Mexico. The press interpreted the gap between the company’s rhetoric and its business practices as a cynical attempt to “greenwash” its corporate image.

There is no inoculation against bad press. Everyone gets some. To paraphrase Winston Churchill, the reporters who sit at your feet one day will be at your throat the next. But companies can minimize that risk if they identify the reputational implications of their operations, processes, and governance ahead of time. And they can cut the time to recovery if they match that assessment with operational strategies to deal with risks that actually become damages.

AT&T’s reputation, for example, teetered during a total outage of its long-distance phone network in 1990—and recovered within a matter of days, thanks to prior decades of reliable service, quick ownership of the problem, decisive action to fix it, and the decision to give its customers a day of discounted calling as thanks for their understanding. Of course, the company ran the obligatory ads apologizing for the outage. But the dip in its reputation actually began to recover even before the ads appeared.

The real role the company’s top PR counselor had in that crisis was not to oversee the writing of news release and the preparation of ads. Her name was Marilyn Laurie, and she was the highest-ranking woman in the company up to that point. She was in charge of public relations, but in fact, her most important contribution happened months and even years before the crisis, as she worked shoulder to shoulder with the company’s line managers to identify risks—even the “unimaginable” possibility that parts of the phone network would go down.

During the recovery, she continued to counsel them on minute-by-minute decisions that had to be addressed, such as whether or not to instruct customers on how to make calls on competitors’ networks. (The obvious answer, at least to her, was “Hell yes.”) And when all the dust had settled, when few of her colleagues were particularly interested in reliving those harrowing hours, she forced a full-scale review of learning and lessons that could be integrated into the company’s risk management processes.

Reputational risk can’t be isolated like legal risk; it is closely linked to what the business is about, and multiple managers “own” it. Reputational risk is more than a communications issue—it’s a key consideration in every business decision.

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The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.