Embracing Reputation at the Board Level
Boards are at an inflection point in how they steward reputation for value. Awareness is growing that reputation can be a source of competitive advantage.
Corporate boards have always valued the reputation of their businesses. Traditionally, they viewed reputation as an important asset, which they are expected to protect or fix as and when the business encountered threats. But today boards are at an inflection point, moving from an implicit to an explicit approach based on the growing realisation that reputation is a determinant of value. As such, it is a potent source of competitive and, therefore, commercial advantage.
The Blue Rubicon Institute’s research examines the factors prompting the shift in the way boards are addressing reputation strategically, operationally and culturally (Teneo acquired Blue Rubicon in July 2015). Over 12 months, our research team interviewed chairs, independent directors and board secretaries from 30 private and publicly listed companies in a range of regulated and unregulated sectors. It makes a compelling case that boards are moving away from only addressing reputation implicitly and on a case-by-case basis to adopting an explicit and acute focus on reputation.
This desire to better understand reputation and its contribution to growth is fuelled by changes in society, local and geo-politics, regulation and technology. As boards look to the future of their businesses, as they rebuild themselves following the financial crash, these dynamic and complex issues are prompting them to ask whether reputation is being rigorously and systematically shaped within their organizations.
Supporting Growth Strategies
There is evidence that boards increasingly want to stand back and make a broad and deep assessment of stakeholders, their motives and expectations. Boards will always be alert to short-term imperatives, but when focusing on long-term challenges, they are exploring areas where reputation contributes to the business. This includes:
- Sustaining the existing business model and/or the transition to a new one
- Bolstering the value of the corporate brand
- Mitigating risks, reducing costs and limiting regulatory constraints
- Maintaining strategic freedoms and providing the oxygen to execute strategy effectively
- Understanding how reputation is enabling or constraining the effective execution of strategy and limiting the business’ options
Boards are exploring the value of taking an enterprise-wide perspective, rather than a narrow issue-by-issue view, by which the leadership may assess the interconnections and impacts from the ground up and across borders and silos. They are also exploring the extent that reputation risks are critical to business dependencies (such as talent, resources and licences) and that they are monitored, mitigated and managed effectively.
Research highlights the level of boards’ interest in reputation. The focus is manifesting itself in three ways. First, boards are strengthening their understanding and oversight of a business reputations and their impacts. Second, boards are focusing on reputation as an input and an outcome of strategy, operations and culture. And third, they are strengthening their accountability for reputation.
Strengthen Understanding of Reputation
Boards are beginning to address some of the challenges that have hindered leaders’ and managers’ ability to shape and steward reputation.
First, define what is meant by reputation in a language that works for the business and on the back of that, establish principles through which reputation will be managed. It is only by defining reputation that boards take the fundamental first steps to strengthening their oversight of its management. One independent director told us: “The board should be educated on reputation, so we understand what value is at stake and where the leverage is.”
As such boards are starting to give more time (at least once a year) to debating reputation holistically in a way that is increasingly framed by reputation’s role in enabling strategic goals, mitigating risks and sustaining business dependencies.
Second, understand that boards have a growing appetite to receive the insight, intelligence and indicators that will in turn strengthen their judgement. Boards have been frustrated by a lack of rigorous reputation analysis. However, a new generation of decision-business intelligence about reputation is emerging and is providing detailed insight built from the bottom up, measuring specific potential impacts on business value. For example, we see an interest in reputation business intelligence that enables an understanding of the impact of reputation on both costs and growth. In a number of boardrooms, there is interest in indicators that review reputation performance, and draws out its strategic goals and business targets.
Lastly, boards are looking to strengthen their relevant expertise and capabilities to assess reputation issues. While boards will look to build on these capabilities it is unlikely that chairmen will bring in new independent directors to the table solely for their reputation expertise. But the profile of board members is increasingly likely to reflect the need for wider and deeper perspectives to help the board and executive teams better understand the externalities that shape stakeholders’ expectations. In this respect there is an opportunity for independent directors.
Boards are increasingly seeking outside expertise to help them better understand stakeholders of value and how they interact and interconnect and spot opportunities and risks that have been hidden. They want perspectives that understand both the tools that stakeholders are using and the implications of generational shifts in the public and consumers.
Address Reputation Questions Strategically and Operationally
Boards are beginning to challenge and help executive teams apply a reputation lens to the process of shaping strategic options, making decisions and allocating resources. For example, they are analyzing the opportunities for reputation to build and sustain competitive advantage over the long term. They are also aligning reputation strategy with the corporate strategy providing a subsequent framework and narrative for divisional, regional and business unit reputation plans. Meanwhile, they are examining reputation risks that may constrain the execution of that strategy or undermine critical business dependencies and as such put in place rigorous reputation risk mitigation.
Underpinning all of this is a need to ensure that the business identifies and establishes the right indicators to monitor and review performance and impacts.
Hard wiring reputation into the business is one of the most significant aspects of the inflection point that boards and leadership teams are experiencing. In essence, it reflects the requirement for every part of the organisation to play its role influencing reputation. It’s a point McKinsey recently picked up, arguing that: “External engagement cannot be separated from everyday business; it must be part and parcel of everyday business.”
It is a point echoed by many of our interviews. One Fortune 500 independent director said: “Improving reputation has to encompass a ‘stepping back’ and understanding that reputation is all the things that you do. It’s your supply chain strategy, it’s your procurement strategy, and it’s a lot of other things that you do and not limited to doing an advertising campaign.”
Boards are only beginning to think about the elements of an effective reputation framework. Their focus is both on achieving value and avoiding unnecessary bureaucracy. They are thinking about how to embed reputation into the value chain, the operating model and organizational design across the enterprise.
The importance of culture in determining behaviors is for many boards the biggest driver of reputation. It is seen as the glue to achieving an effective organisational approach. Indicators – such as employee engagement or assessments of leaders and managers and whether they live the values of the business – tell the board the extent to which culture is fit for purpose or alerts them to where systemic problems and reputation risks are.
Strengthen Reputation Accountability
One of the strongest findings from our research is the heightened sense of the board’s accountability for reputation. They are also looking at how to ensure reputation is given the time and space its complexity demands within governance structures and board authorities.
Critically, shareholders ask about the impact of reputation impact on performance beyond the traditional scope of environmental, social, corporate governance and socially responsible investment. And investors increasingly want to understand the extent to which reputation is being managed for competitive advantage and to reduce risk or whether sub-optimal reputations are distracting managers and increasing costs and inefficiencies.
Boards are starting to seek assurance on the reputation capabilities of their executive teams with individual directors under greater pressure to be more accountable. In the words of one FTSE 100 chairman: “board members’ personal accountability for reputation is now more intense.”
For example, they want to know that they can make effective trade-off decisions balancing the short- and long-term requirements of stakeholders; and they want assurance that they can judge that the business model is fit for purpose from a reputation perspective.
So boards are addressing reputation accountability in three ways: through more effective oversight and reporting; through bolstering reputation risk processes, capabilities and data; and through embedding reputation in both governance and compliance.
The approach to oversight, reporting and review is a work in progress for the majority of boards. However, the desired direction of travel is clear: non-executive directors and chairs want a collaborative conversation about what they see as a critical intangible as they have yet to establish a simple and coherent framework that allows effective reporting from a number of perspectives.
The process should not be a box-ticking, compliance-driven exercise focused purely on risks to reputation but should address building value. It should not be based on rigid top-down reputation drivers but rather assess reputation at a detailed front-line level. Meanwhile, they would wish to see reporting and oversight based on meaningful insight from rigorous systems and relevant sources.
For many boards risk is the entry point to discussion on reputation. The discussion is prompted by questions around whether reputation is a primary or secondary risk or both. The debate is helping them to recognise that they have previously focused more on the symptoms rather than the causes of risks.
The leadership wants to know how effective the business is in applying a reputation risk lens to existing data and joining the dots between apparently unconnected data points. They are also examining the effectiveness of the radar and early warning systems in place and whether authorities and escalation processes are fit for purpose in an age of immediacy.
The governance challenge is focused on debating the right balance between existing structures and new ones to give reputation sufficient focus and time without creating unnecessary tiers of bureaucracy. For example, a number of bank boards have established separate committees or sub committees to ensure the complexities of reputation receive the attention they require. For some businesses this will create valuable space for review and challenge, but for others there is a concern that the proliferation of committees or sub-committees is a cause for concern with the potential danger of missing the wood for the trees.
Opportunities for the Board
For boards, the shift from addressing short-term reputation imperatives and risks to focusing on long-term sustainable and strategic reputation building that supports value creation is a significant challenge.
We believe the starting point for all boards examining these points can be found in addressing five key questions:
- Where are our reputations valuable; where do they matter to the business?
- What should these reputations be to enable growth?
- What are our reputations now? Are there gaps between current position and optimal reputation?
- Why and what do we need to do to close the gaps?
- How will we know we have been successful?
The answers will indicate to boards the value of defining and debating reputation. Meanwhile, the process will help boards identify the insight they need and the value of applying a reputation filter to the information they already receive.
Most critically perhaps, the process should shape both the board’s and executive team’s assessment as to where reputation determines value deep in the business, across the value chain and as an outcome of day-to-day processes. These answers should be part of the journey to embed reputation into the organisational framework.
The questions provoke a more forensic focus on whether reputation is or should be more effective in helping the business meet its strategic challenges and the existing and potential reputation risks. And in turn, this leads to the alignment and integration of the reputation strategy with the corporate strategy and risk appetite.
This inflection point is the recognition of reputation’s rapidly increasing demand on the board heralding greater sophistication in the makeup and capabilities of those sitting round the table. The net result is that boards will be better equipped to support the business in delivering greater competitive advantage through a more systematic stewardship of reputation.