Reputation risk: it is the board's ultimate responsibility.

Publication: Journal of Business Strategy

Publication Date: 01-MAR-06

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When one of Australia's largest companies suffered two major financial crises, the CEO was fired and soon after the board imploded. Infighting among directors led to the chairman and a number of other directors resigning their positions. The whole sorry saga made front-page news for weeks. Until this happened this board was regarded as one of the country's most distinguished.

This case illustrates the old Chinese saying that "the fish rots from the head". During the press investigation of how such a respected board could unravel so quickly, it was discovered that personal tensions had existed among some key non-executive directors for years. It just needed a crisis and the subsequent apportioning of blame among board members for these tensions to interact with the egos of some the prominent members to cause the board implosion. The personal reputations of the participants suffered equally with that of the company.

While any high-profile executive management failure puts the spotlight on corporate governance, it also highlights the issues of trust and reputation and moves these into the area of risk management. If trust is present in stakeholder relationships and if it is reciprocated, it can be an important driver of improved company performance. On the other hand, the loss of reputation and trust can result in:

* increased scrutiny by regulators, insurers, and society;

* reduced patronage by customers and investors; and

* lower employee morale.

Why the board?

Reputation experts suggest that managing and protecting a company's reputation is primarily a CEO responsibility that is shared with other executive managers. They go on to argue that every employee is ultimately responsible for the carriage of the company's reputation. While this is a sensible line of argument, I would like to propose that corporate reputation management should start with the board of directors. Furthermore, because this seems to be the exception rather than the rule, the boards of many large, complex companies have put the reputations of their companies at risk, and continue to do so.

To explore this issue requires looking at the nexus between corporate governance and corporate reputation. While it is difficult to find any director who will say that his or her board is not concerned about the reputation of the organization, unless a crisis occurs, the topic of corporate reputation seldom appears as a formal agenda item in board papers. Thus, corporate reputation is like corporate culture--always present in the background and occasionally mentioned in exceptional circumstances.

In the last few years, there have been many new books dealing with corporate governance. However, a quick look in the index of some of the most popular books reveals no entries for the issue of corporate reputation[1]. Thus, corporate reputation does not seem to be on the formal agenda of these advisors to corporate boards. What about the corporate reputation experts? Do they target their advice to boards of directors? Only rarely, it seems. A look in the index of the popular books on corporate reputations produces a similar result--only a very occasional entry for corporate governance or board of directors[2].

The key issue here is that if corporate reputation is not a formal topic for corporate boards and their advisors, it is likely to be crowded out of the formal discussion by the regular items on the board's agenda. Now, as outlined below, while some of these other topics are lead indicators of corporate reputation risk, they are no substitute for the main game.

When boards put their company's reputations at risk

One critical time when a board puts the reputation of the company at risk is when a new CEO is appointed. Anyone who has ever sat on a senior management selection committee will know the difficulties associated with gathering enough valid and reliable points of reference to calibrate a potential CEO's strategic skills, financial acumen, and personal ethics to make the best choice--especially for an outside candidate. The short tenure and the unexpected resignations of CEOs is ample testament to the risks involved here (Lucier et al., 2004).

On an ongoing basis, boards have to ratify many decisions put to them by the CEO. These decisions focus on...

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