What is reputational capital? How important is an organization’s reputation? Why is it important? What is its value? What is a key determinant of an organization’s reputational capital?
Let’s explore these questions.
Caves and Porter, 1977, describe corporate reputational capital as both an intangible asset and a source of strategic competitive advantage that enhances a corporation’s long-term ability to create value. (Caves, R. E. and Porter, M. E., 1977, From entry barriers to mobility barriers, Quarterly Journal of Economics, 91, 421-434.)
The Value Of Reputational Capital
From the following citations, it seems that reputational capital has extremely high value in regards to corporate loyalty, competitive advantage, financial stability, and growth.
“Delivering functional and social expectations of the public on the one hand and managing to build a unique identity, on the other hand, creates trust and this trust builds the informal framework of a company. This framework provides ‘return in cooperation’ and produces (positive) reputation capital. A positive reputation will secure a company’s or organisation’s long-term competitive advantages.” Reputation Capital: Building and Maintaining Trust in the 21st Century, Klewes, Joachim & Wreschniok, Robert (2010).
“Reputation capital is a corporate asset that can be managed, accumulated, and traded in for trust, legitimisation of a position of power and social recognition, a premium price for goods and services offered, a stronger willingness among shareholders to hold on to shares in times of crisis, or a stronger readiness to invest in the company’s stock.” Reputation Capital: Building and Maintaining Trust in the 21st Century, Klewes, Joachim & Wreschniok, Robert (2010).
A good reputation is more valuable than money. ~Publilius Syrus
In Harvard Business Review, Reputation and Its Risks, Robert G. Eccles, Scott C. Newquist, Roland Schatz, February 2007 Issue names three elements determining the extent to which a company is exposed to reputational risk.
1. Reputation-reality gap
For example, reputation-reality gaps concerning financial performance often result in accounting fraud and (ultimately) restatements of results. Computer Associates, Enron, Rite Aid, Tyco, WorldCom, and Xerox are some of the well-known companies that have fallen into this trap in recent years. Another example would be Volkswagen using software to manipulate exhaust emissions during government testing.
2. Changing beliefs and expectations
The changing beliefs and expectations of stakeholders and customers are another major determinant of reputational risk. When expectations are shifting based on corporate statements or brand marketing but the company’s DNA stays the same, reputational risk increases. (Research In Motion is a classic example of this).
3. Weak internal coordination
Another major source of reputational risk is poor coordination of the decisions made by different business units and functions. If one group creates expectations that another group fails to meet, the company’s reputation can suffer. A classic example is the marketing department of a software company that launches a large advertising campaign for a new product before developers have identified and ironed out all the bugs.
We’ve all read the headlines of corporations that have virtually downgraded or destroyed their reputational capital, such as Research in Motion, Wells Fargo, Volkswagen, Microsoft, Sears Auto Centers, BP and, recently, United Airlines and Uber.
What are the costs in time, money, connections, growth, and so on? What underlies these grand mistakes that have such negative consequences in so many ways and on so many levels?
How organizations deal with their mistakes can be as critical, or even more severe, as the initial mistakes themselves.
Culture and Reputational Capital
The diagram above attempts to describe how organizational culture is the foundation to create quality products and services as well as the capability to build effective relationships with an organization’s customers, employees, community, financial institutions and its potential marketplace.
Positive, consistent interactions and ‘experiences’ with an organization, by both internal and external people, results in gaining trust and value with that organization. Such trust and value, built up over time as an extension and a reflection of an organization’s culture, becomes the key determinant of an organization’s reputational capital. Thus, everything stems from an organization’s culture—positive and negative.
Culture is a business strategy.
Four Specific Gains
Developing a positive culture as a foundation for creating reputational capital can yield these gains:
1. Attracting and Retaining Capable People
The general question by capable people who want to work with good organizations is simple; “What is it like to work for XYZ organization.”
It is no longer a secret on what it is like to work for an organization. These days such feedback is public through employee opinions which are displayed through social media sites such as GlassDoor, Indeed, Vault, and Hallway. This feedback is centered around the experiences of current and former employees with a certain organization. People now seem to find more validity in these social mediums than in the ‘official, great looking words’ on corporate web pages where every organization seems like a utopian Shangri-La.
But, let’s not rule out ‘word of mouth.’ Personal and professional contacts are still critical in getting answers to what it is like to work at a certain place, and people will give quite honest opinions about what they experience. For capable employees, retention is what it’s all about through creating the conditions where people want to stay, want to contribute, and want to have a healthy, success-based experience.
So, what is the cost to ‘attract and retain’ capable people? What is the cost to ‘turn-off’ capable people?
The main question is: What is THE underlying distinct organizational feature to attract and retain good, capable people?
Personally, I’ve known a number of people who have taken less compensation but have chosen a place where they feel wanted as a person (how revolutionary!), know that they can contribute their capabilities to the whole, and choose a place that is ‘open’ so she/he can do what they do best without ‘mom and dad’ looking over their shoulders, as well as not having structures and policies that would constrict them like a twenty foot anaconda on a hungry day.
2. Attracting And Retaining Customers and Market Share
According to Trackur, a social media monitoring tool, traditionally 96% of unhappy customers will never complain directly to the company they’re peeved with, but they will mention their complaint to fifteen or more friends. All that is now exploding rapidly with social media as hundreds and even thousands of people can be influenced about an organization by people’s positive and negative stories every day.
It is estimated that online consumer reviews are read anywhere from 67-97% by potential consumers, depending on which study you cite. People now have a voice by using on-line community-driven consumer review platforms such as Yelp, Amazon Customer Reviews, Angie’s List, Trustpilot, TestFreaks, Which?, Consumer Reports, and TripAdvisor as the most important resources for consumers looking to make informed purchase decisions based on direct customer experiences.
The ripple effect of what people experience through their interactions with an organization in terms of product quality, service and problem-solving can be immediate and enormous to their reputational capital one way or the other.
And what has the greatest influence on the quality of product, service, and experiences by the customer?
3. Financial Support And Business Growth
“Growth, after all, is heavily dependent on investment, and a significant percentage of all investment flows through financial institutions. By reputational capital, we mean the influence in incremental (increase in) profits that accrue to borrowers when they have good reputations. Each period, borrowers have an incentive to maintain this reputation because if the reputation is ruined, borrowers lose financial opportunity in addition to these excess profits in all subsequent periods.” Financial Sector Development Policy: The Importance of Reputational Capital and Governance, Thomas Hellman And Kevin Murdoc, “Development Strategy and Management of the Market Economy,” vol. 2, eds. R. Sabot and I. Skékely, Oxford University Press, 1998.
This simply means that ‘reputational capital’ is becoming more and more a part of considerations to gain financial support and a lessening of lending rates (risk management) based on the realization of incremental increases in the bottom line. Without financial support, the growth of any business is significantly hampered. The general question for potential financial partners is simple; “What is the risk to invest in XYZ organization.”
Again, what is the underlying foundation for the opportunity for financial support and continuous business growth based on reputational capital?
That’s right … it’s the Culture!
4. B2B Reputation
“A recent Corporate Executive Board study of more than 1,400 B2B customers found that those (B2B) customers completed, on average, nearly 60% of a typical purchasing decision—researching solutions, ranking options, setting requirements, benchmarking pricing, and so on—before even having a conversation with a supplier.” The End of Solution Sales, by Brent Adamson, Matthew Dixon, Nicholas Toman, Harvard Business Review, July–August 2012 Issue. (https://hbr.org/2012/07/the-end-of-solution-sales)
The general question for potential supply-side partners is simple: “What is it like to work with XYZ organization.”
The underlying factor in this discovery is organizational culture. Building ‘trust’ and ‘value’ through people’s experiences is paramount in creating, retaining and mending reputational capital.
“Trust takes years to build, seconds to break, and forever to repair.” ~Author unknown
It’s interesting to note that in reading many articles about ‘strategies to create, retain or mend reputational capital,’ only one mentions ‘organizational culture.’ Why do you think that is?
Can you share an experience or good story regarding the gain or loss of ‘reputational capital’? How was ‘organizational culture’ involved? What can we learn?
I invite your comments and thoughts below.