Given my current university affiliations and teaching responsibilities, I spend quite a bit of time thinking how we should best train future leaders to help prepare them for the complex, volatile and unpredictable environments that they must learn to navigate. Before the Internet brought the world much closer together, change propagated relatively slowly and often became attenuated and lost intensity before reaching other parts of a business and the economies and societies in which it operates. Not so today. In our increasingly integrated world, change now propagates much faster, and its impact will often lead to unexpected serious problems that a company’s leaders have to learn to deal with.
My own personal experience has been primarily with the impact of disruptive technologies and innovations on business. Thus, my seminars and courses have generally focused on the management of technology-based business transformation, the transition to an information-intensive, knowledge-based economy and related areas. But, beyond my core interests at the intersection of technology, management and complex systems, I have been thinking quite a bit about the central role of trust and reputation now plays, especially for highly visible global companies that are leaders in their industry.
Regardless of how it eventually comes out, the ongoing News Corporation scandal is a real time case study of the importance of trust and reputation to a powerful global company. As we now know, for the last few years, employees of the British tabloid News of the World have been accused of hacking into the phones of celebrities, politicians and members of the British Royal Family in the pursuit of juicy, exclusive stories. They have also been accused of bribing members of London’s Metropolitan Police Service.
Few paid much attention to these allegations. But then, the scandal went viral seemingly overnight and reached its current critical stage when early in July of 2011 it was revealed that the hacking extended to the phones of ordinary citizens, including a murdered school girl, relatives of deceased British soldiers and victims of the London bombings of July 7, 2005. These latest revelations resulted in a public outcry in the UK against the News Corporation, its chairman and CEO Rupert Murdoch and other senior executives of the company.
The News Corp crisis once more shows how important trust and reputation is to the smooth operation of a company, especially one that is highly visible and successful around the world. It also shows how fragile that reputation can be in our Internet and globalization age, when information travels around the world in milliseconds and its ensuing impacts seem to propagate almost as fast.
In a recent paper, “Trust and Reputation in the Age of Globalization”, Mark Eisenegger of the Institute for the Public Sphere and Society at the University of Zurich observed that trust “is the most important operational resource in our society.”
“. . . The more we have learned to trust an agent (for example, a company), the more comfortable we are likely to be relying on that agent in the long term. For trust is based on the experience that an agent has fulfilled our expectations in the past. And trust creates confidence that that agent will also fulfill our expectations in the future. For this reason, trust cements existing relations and at the same time acts as a magnet for future relations. . . .”
“However, it is only in rare cases that we can base our trust in those with whom we interact on our own experience. And this is where reputation comes in. For, whenever we are unable to rely on our own experience, we must fall back on the recommendations and judgments of others. Such recommendations, however, are nothing else but reputation judgments, which we then use to guide us - among other reasons, because it saves time and money.”
Reputation is typically framed along multiple dimensions. The two key ones are functional reputation, i.e. competence, and social reputation, i.e., responsible behavior.
Generally, we associate business competence with high quality products and services, and solid financial results. It is the most concrete, quantifiable dimension of reputation, and consequently, the easier to objectively measure and manage.
The key question regarding social reputation is whether the company is a good community citizen, and in the case of a company doing business around the world, whether it is a good global citizen. Is it concerned with social responsibility in addition to profits? Is it respected by opinion leaders? While competing aggressively in the marketplace, is it fair toward other companies? Is it liked by its customers, employees and other key stakeholders?
Reputation expectations keep shifting in markets and societies. The bar for leadership keeps getting raised. For example, over the past several decades we have seen a significant rise in the quality of products. Companies like Toyota developed the innovative Toyota Production System for managing quality and productivity in all aspects of their operations. Other companies around the world followed suit, and we saw the rise of programs like Six Sigma, Lean Production and Total Quality Management.
Companies with a reputation for inferior quality could no longer compete in the world stage. They were punished with the loss of market share, lower profit margins and weaker financial results. Just about all companies put management programs in place to monitor the quality of their key products and processes. Serious quality issues quickly turned into major crises that had to be quickly addresses and corrected.
Something similar is now happening with social reputation and corporate social responsibility (CSR). In a special report published in January of 2008, The Economist noted that: “Corporate social responsibility, once a do-gooding sideshow, is now seen as mainstream, . . . For a number of reasons, companies are having to work harder to protect their reputation - and, by extension, the environment in which they do business.”
It later added:
“One way of looking at CSR is that it is part of what businesses need to do to keep up with (or, if possible, stay slightly ahead of) society's fast-changing expectations. It is an aspect of taking care of a company's reputation, managing its risks and gaining a competitive edge. This is what good managers ought to do anyway. Doing it well may simply involve a clearer focus and greater effort than in the past, because information now spreads much more quickly and companies feel the heat.… Paying attention to CSR can amount to enlightened self-interest, something that over time will help to sustain profits for shareholders.”
Mark Eisenegger published “Trust and Reputation in the Age of Globalization” in 2009, and his research dealt primarily with the impact of the financial crisis. But his key findings are just as applicable today to the ongoing News Corp crisis:
First: “In the global age, corporate social responsibility, or social reputation, has become significantly more important . . . On the one hand, it is important to note that ethical questions have assumed central news value in the international media arena. Questions about ‘good’ and ‘bad’ have become core ratings generators in modern journalism. On the other hand, politics has - crucially - not been able to keep up with the globalisation of the economy. Because politics, which for the most part operates at nation-state level, is unable to ensure social well-being on a global scale, pressure has increased on multinationals to assume social responsibility.”
Second: “ . . the world of social reputation is a minefield for global players. For the reputation management of global players this means: functional reputation [competence] offers the best opportunities for profiling the corporation. By contrast, as far as social reputation is concerned, a defensive strategy is called for: the aim is not to garner applause, but instead to avoid attracting negative headlines . . . credible social responsibility is about action, not words. In the social world, companies should quietly comply with social standards without continually broadcasting their commitment. Managing social reputation by public relations alone is perilous.”
“ . . . the biggest risks in the social world are born by the Goliaths of the economy, that is, the global players. . . The bigger and more powerful the global player, then, the greater the pressure of expectations and the more critically the actions of these market giants are monitored. . . As the size of a company increases, so too does the need to professionalise reputation management.”
Third: “Not only the rash cultivation of social reputation is dangerous, but also an exaggerated personality cult. The more strongly the reputation of a company is fixed to an entrepreneur or CEO, the more vulnerable it is. It is hard to attribute fault for wrongdoing to an abstract entity like an entire company. A famous person, by contrast, can be superbly pilloried. Also, if a company is perceived too exclusively in terms of its top management, it must rebuild its reputation each time management changes. This is expensive. Many companies have underestimated this in the past: they have encouraged a star cult, thus inhibiting the establishment of a sustainable reputation.”
As was the case with quality and productivity over the past few decades, the growing importance of social reputation will significantly impact the management and culture of companies around the world. We need to carefully study the case of News Corp as well as similar such cases to come up with best practices that can help guide what global companies need to do to better manage their values and ethical behaviors. Finally, business leaders need to understand that it is up to them to devote a significant amount of attention to their social reputation, and to setting the right values so everyone in the organization knows where the lines are that they absolutely cannot cross.
I think we, in America, have entered a troubling period. Our very future is at stake.
Most of us have operated in the past as honest, ethical and law-abiding citizens. Most people operating within companies, governments and other institutions have, to their credit, abided by this troika of good citizenship practices. The vast majority of our people continue to hold these values and practice their beliefs (values) in all that they do.
Unfortunately, today a disturbing number of private citizens, business and government officials have concluded that they need not limit themselves to honorable, ethical and legal behavior. Many seem happy to skate by on a legal basis only. God knows there is an army of lawyers ready and willing to exploit the many loopholes enshrined in our system of laws, statutes, and regulations. For the unethical, the dishonest, It is possible to go through life undeterred while riding the razor-edge of legality.
Shading the truth, spinning context, ignoring or outright denial of the facts has become commonplace. Corrupt and illegal business and personal practices, e.g., the Madoff atrocity; a president quibbling in a court deposition about the definition of “is”; the Enron practice of manufacturing shortages to extort higher prices; a president taking our country to war under false and politically motivated, manufactured pretenses; politicians (e.g., a political party taking hostage the required rise in the debt ceiling) who seem ready to forfeit the well-being of our country to accomplish a very narrow-minded and dubious political objective ...all these are examples of the deterioration of our national character and are a deep, dire threat to our very existence as a functioning democracy.
Our country is on a fast path to banana republic status. Driving us along this pathway is the breakdown in honesty and ethics and a belief by too many of our countrymen, corporate and government leaders that if it is legal, then it is right. Nothing could be further from the truth. To be right requires the traditional dimensions of honest and ethical to be added to legal.
The News Corporation debacle is a global example of what happens when a company, a government or individual looses their moral compass.
I remain thrilled for having lived and worked for a company that had a working set of Belief's to guide the actions of management and employee alike. It is regrettable that all companies, governments and people are not so blessed.
Posted by: Bud Byrd | August 04, 2011 at 02:28 PM
Social Reputation in the Age of Globalization is just such a post and worth a read. Without a stong ethical foundation not much else of what one possesses can be of value. It is based on trust. Without trust, we would simply be unable to act. If we were not able to trust third parties to act as we expect them to act, we would do anything to avoid getting ourselves involved with them. Yes, We need to carefully study the case of News Corp as well as similar such cases to come up with best practices.
Posted by: Business Process Outsourcing | August 17, 2011 at 03:17 AM