Monday, May 28, 2012

It's not all fluffy: why CEO's should take note of Reputation Governance.

26th May 2012

I was kindly invited by Sifiso Falala, CEO of Plus 94 Research, to address the Mail & Guardian’s Top Companies Reputation Index Awards. Here is a copy of my talk:

Last year, you may have been lucky enough to listen to the charming and insightful Michael Judin. I have it on good authority he talked a lot about Arsenal. I’m not going to talk about Arsenal, mainly because I’m a Man U girl.

But I do want to talk a little about an area that Michael and I have been exploring, based on his work in the writing of King III, and the increasing importance of Reputation in Governance.

Our question is:  “Who’s seated at the top table?”

If I ask you to close your eyes and imagine the following:
  • Julius Malema.
  • Barack Obama.
  • Angelina Jolie.
  • Meryl Streep.
  • Woolworths. 
  • Auction Alliance.
  • Apple.
  • BP

In a heartbeat, your brain has created a reputation index of your own, hasn’t it? It's what Malcolm Gladwell refers to in his book “Blink”, the ability to sum up something in ‘the blink of an eye’.
Obviously the measure of reputation is far deeper than the immediate outward representation, these “snap judgments”. But it’s like Jeremy Bullmore, former Chairman of ad agency JWT, says about how consumers build brands: “like birds build nests – from the scraps and straws they chance upon” little pieces of foam, sticks and twigs from anywhere form our opinions about things, people, products, brands, companies.

Some of these reputations you formed in your mind are because of things you’ve been told, you’ve personally experienced, someone else told you, or maybe something you read on Twitter.

And we all know what happens when what we've been told or promised is out of synch with what is delivered? A change in trust occurs. Of course it can be a positive change (Angelina Jolie went form the weird girl who kissed her brother and wore a vial of blood around her neck, to a paragon of good work with the UN). But if there’s a disconnect, mistrust sets in. A lack of credibility arises. Future dealings are affected.

And boy oh boy is there a lot of chat.

On every social network, word of mouth is amplified. Take the Zuma spear story. How many of you have ever been to an exhibition at the Goodman Gallery? How many of you would have seen the picture in its exhibition? How many of you saw the picture in the press? How much more damage was done by the reaction to the painting? The impact of the social media in this case is staggering. As of yesterday (24th May), the online reputation management company, Brandseye, reported that 108 million people had engaged with the issue online!

We know that there are two fundamental areas in which things can go wrong:
·      Where there is a gap between what you say, what you do
·      Where there is a gap between what you do and what people expect you to be doing.
(Source: Yardstick)

And many companies only realize the potential impact of it, when it all goes horribly wrong. This breakdown in reputational trust can shut a business down.
Ask Rael Levitt.

I read a great report called “The Trust Deficit – views from the Boardroom”, and their point was that every business nowadays starts with negative trust: a Trust Deficit. As one FTSE 100 CEO commented, “in the world of business, it’s not you’re innocent till proven guilty: it’s - prove that you’re not guilty first”.

There is growing scepticism and cynicism about claims and actions of businesses – primarily driven by the behaviour of the financial institutions abroad, but in daily actions that undermine the trust we had in a company or brand, or the expectation we had from them. We’re seeing this in the role of the National Consumer Commission and the CPA (Consumer Protection Act). Take the Woolworths Frankie's example, where there was outrage the Woolworths had copied (‘stolen’) a small producers retro drink’s concept.

And, as with the Woolworths example, the greater the trust in a company or brand, the greater the outrage and sense of being let down, when they do something we don’t expect from them. The flip side is the greater the trust, the more rope we will sometimes give them.

A wonderful example of this is, years ago, I used to work on a Trade Opinion panel, with Perry & Associates. Interviewing the Checkers guys, they said: “when a customer finds us out of stock, they’re furious with the store manager. When a Woolworths customer finds that something they wanted is out of stock, they say “I should have got here earlier”.

CEO’s see the increasing need to verify claims and demonstrate trustworthiness - more independent or external certification to prove they are trustworthy (eg Fairtrade, Beauty without Cruelty). In SA, testing beauty products on animals is illegal – you can’t have beauty with cruelty or you’ll be in jail. So there is no real need for this badge – yet we want it anyway. In the absence of this proof, businesses feel they are deemed untrustworthy. Any malpractice is deemed indicative of a greater malaise anyway: “I knew it – they all do the same”.

There is also the dynamic of the 24 hour news cycle: as one CEO said, “the media has got the news almost as soon as the Company has it”.

So the quick turn around of news is forcing companies to react much faster - how fast is fast enough? Take the recent Blackberry example, when it took several days for the company to respond to a Twitterstorm about a network problem.


Also, this thing called trust is also deeply personal. It’s about relationships. Trust cannot be outsourced. And I’ll talk more about outsourcing later.

Now, I know that we all know all of this.

We understand the business imperative of reputation management, of building and maintaining trust amongst our stakeholders, by saying, then doing, then delivering. And the risks if we don’t. Warren Buffet said it succinctly, “It takes 20 years to build a reputation, and 5 minutes to ruin it. If you think about that, you will do things differently.” Apple lost $100m due to one blog post! (See this excellent article by Tim Shier, Quirk).

However, if we take a look at how this year’s Reputation Index pans out – the 8 factors show us that there are areas we are doing far better than others. The ranking is as follows:

  1.  Financial performance 
  2.  Products and Services
  3.  Vision and Leadership
  4.  Workplace environment
  5.  Governance
  6.  Communication 
  7.  BEE
  8.  CSR

And this emphasises our key question:

How come the areas that define how we engage or communicate with our diverse stakeholders (Communication and CSR) are so low on the list? Remember – these are the scraps and straws we can actually control, in a world of communication that is largely out of our hands.

And, when I say ‘communication’ its not just external. Employer branding plays a vital role. Sustainability and community engagement are also critical areas both of communication and CSR.

So why so low on the scale?
In our opinion it’s because they’re too far removed from the Board, from the CEO. Are Boards too focused on the operational and inward aspects of Reputation? Have the communication aspects of Reputation been too far outsourced inside and outside the organisation?  We think so.

Corporate reputation seems to have separated out from Brand reputation. Corporate reputation has the CEO’s ear. But the discussions of how the overall corporate reputation is maintained and built through its brands’ messaging and actions, are missing in action on these boards.

How many Marketing Directors do you think sit on Boards?

I asked Donovan Neale May, the head of the Global CMO Council and he said “worldwide, we estimate less that 5 percent of corporate boards have experienced marketers as either internal or external directors.”

We estimate that under 20% of companies in SA have a strong marketing presence on the Board. And, we have it on good authority that those Marketing Directors that do sit on their Board often feel undermined, too often treated like a cost centre, rather than a strategic business builder.

Perhaps this is because of what they call the CEO-CMO disconnect.

In a study done by Fournaise in the UK, US and Europe it was found that 73% of CEOs think marketers lack business credibility.

Some of the top issues CEOs have with their Marketers are: 

·      They keep on talking about brand, brand values, brand equity and other similar parameters that their top management has great difficulties linking back to results that really matter: revenue, sales, EBIT or even market valuation (77%)
·      They bombard their stakeholders with marketing data that hardly relate to or mean anything for the company’s P&L (70%)
·      Unlike CFOs and Sales Forces, they don’t think enough like businesspeople: they focus too much on the creative, “arty” and “fluffy” side of marketing and not enough on its business science, and rely too much on their ad agencies to come up with the next big idea (67%)

The worrying part: while 73% of CEOs think Marketers lack business credibility and are not effectiveness-focused enough to generate incremental customer demand, 69% of the Marketers Fournaise talked to feel their strategies and campaigns do make an impact on the company’s business, even though they can’t precisely quantify or prove it – confirming the great CEO-Marketers disconnect.

The report is summed up like this:

“Until Marketers start speaking the P&L language of their CEOs and stakeholders, and until they start tracking the business effectiveness of all their strategies and campaigns to prove they generate incremental customer demand, they will continue to lack credibility in the eyes of their CEOs and will continue to be seen more as a cost centre than an asset” said Jerome Fontaine, CEO & Chief Tracker of Fournaise.”

So, the CEO thinks the Marketer is talking about arty and fluffy things?

Yet, these are two of the areas in which they rank lowest in terms of Reputation Index?

Is it because their role is seen only as “generating incremental consumer demand”? That may have been their role in the past, but in today’s world, their role has become much, much broader than that.

What piqued our attention, was King III’s attitude towards management of reputation.

There is a new age afoot. And it may as well be called “Brand Governance”.

King III has 9 chapters and a full chapter is dedicated to the issue of reputation as part of governance. King III’s Chapter 8: Governing Stakeholder Relationships defines the principle that “the Board should appreciate that stakeholders perceptions affect a company’s reputation”.

The Board, it is suggested, is the ultimate custodian of this reputation and the relationships with these stakeholders.

These stakeholders are the very people who may now, in terms of King III,  demand to know what you as a board are doing to protect the value of the brands, the intangible assets are increasingly almost more valuable than the tangible assets. Why have you chosen this positioning? Why have you embarked on this new creative route? Why did you respond in that way to a Twitter conversation? Who is the face of Twitter? Is it outsourced or is it the CEO?

They are the communities who can question your authenticity and ethics in your CSR programmes. They are your staff who ask how you can make promises to customers which they can't keep.

Consumers and communities are now empowered! And we’ve seen huge business losses as a result.

These things traditionally have kept Marketing Directors awake at night.  They’re now going to keep the CEO awake too, unless changes are made.

EisnerAmper, a US based firm, conducted a Board of Directors survey about concerns facing Boards, and found that reputational risk has for the first time overtaken regulatory compliance risk as the primary concern.  66% stated that reputational risk is most important to them (other than financial risk).

It’s time, in our opinion, to marry Governance and Due diligence with Brand management and Reputation.

It’s time for Boards to ask the questions about key reputation issues the brands and the company are facing. It’s time the most senior executives are put in charge of these conversations and these programmes.

An excellent example of this is Michael Jordaan from FNB, who presents an accessible and responsible face of FNB as the CEO, through his personal management of his active Twitter stream (@MichaelJordaan).

Or perhaps  it’s time that the person currently tasked with this increasingly important and critical job, The Marketing Director or CMO, is elevated to a higher place in the organisation.

In our opinion, it's time that Brand and Corporate Reputation be invited to lunch together at the Top Table.