It’s always surprising to see founders willfully ignore good practices when it comes to reputation, whether it’s Fab CEO Jason Goldberg going Jerry Maguire on his employees or Mike Jeffries of Abercrombie and Fitch telling the outside world that fat and/or unattractive people aren’t welcome to wear his company’s clothes.
In the case of Goldberg and Jeffries it would seem that the founders are so convinced of their company’s mission that they believe they need to go on a crusade against the world.
More often, though, founders are focused on short-term wins and conveniently forget about other people’s interests. Like Marc Pincus of Zynga, who admitted in 2011 that he did every horrible thing in the book to see immediate revenues:
“I mean, we gave our users poker chips if they downloaded this zwinky toolbar, which was like, I don’t know–I downloaded it once and couldn’t get rid of it.”
A reputation isn’t just nice to have: A solid reputation is essential to your company’s survival in the long term. Here are seven things all leaders need to understand about reputation, based on science:
Researchers have shown that companies with good corporate reputations enjoy a competitive advantage and higher returns, making a good reputation a valuable and rare asset.
As researchers Peter W. Roberts and Grahame R. Dowling found when they compared the reputation of companies and their long-term financial performance more than a decade ago, “Firms with better corporate reputations are better able to sustain superior financial performance outcomes over time.”
It doesn’t stop there. A good reputation, they found, also helps poor performing firms in their efforts to return to profitability.
That means it’s solid business sense to sacrifice short-term profits for a healthier long-term reputation, as some firms have correctly understood.
Experts reckon that while U.S.-based drugstore CVS may lose close to $2 billion a year in sales after it decided to stop selling tobacco products, the brand will more than make up for its losses by cementing its reputation as a health-conscious company.
Part of the reason why firms with a better reputation perform better is because it’s hard to copy a good reputation.
For your competitors it’s hard to see how all your decisions and processes interact to improve your reputation. Roberts and Dowling call this “causal ambiguity.”
“Because reputations are complex, and the main drivers of reputation creation are embedded inside the firm, they are likely to be associated with a high degree of causal ambiguity, which reduces the extent to which competitors may imitate them,” they wrote.
This causal ambiguity note only makes reputation difficult to copy, but it also explains why a good reputation is so good for your bottom line: The harder it is to copy your assets, the longer you will be able to keep your competitive edge.
In other words, to borrow a term from Ash Maurya’s Running Lean, a good reputation can become an “unfair advantage.”
Of course, it might be that firms with a better reputation have always performed well financially, and maybe they perform better today because they did better in the past. In other words, is it possible that reputation is caused by good financial performance?
Well, not exactly, say the researchers.
Roberts and Dowling found that the better financial performance of firms with a good reputation could only partly be explained by their superior financial performance in the past.
However, 85% of the better-than-average performance could be explained by different sources of reputation, which the researchers called “residual reputation.”
This “residual” part of your reputation can originate in initiatives you take specifically to boost reputation–like advertising, corporate social responsibility efforts, and sponsorship.
But surprisingly, investing in a nice-guy image is not necessary to enjoy an excellent reputation, the research shows. A good reputation can be based on almost anything a company does.
Take the case of Hermès, the luxury-goods brand. Hermès invests very little in corporate social responsibility. Yet in November it topped the league table of reputational value compiled by Consensiv, a reputation-controls firm. Hermès thanks its good reputation largely to its very direct control of the production process.
Or take Indigo, India’s largest airline by number of passengers, as an example: The airline enjoys an excellent reputation mostly because it is known for being on time.
That’s right: Simply being punctual can yield positive reputation points.
Indigo is also a showcase of the direct relationship between reputation and profit margin. Its reputation for punctuality has helped Indigo charge higher prices than its full-service competitors.
Everybody likes companies with a solid reputation, it seems.
Customers are prepared to pay more for their services and products: A good reputation “enhances sales force effectiveness [and] new product introductions,” Roberts and Dowling wrote. It even makes people believe “especially extreme” advertising claims more, the researchers said.
Employees also prefer to work for a company with a good reputation, and they tend to work harder and for lower wages.
This becomes evident in Glassdoor feedback on Apple, a company that pays relatively low wages for long hours, during which time employees are expected to be extremely productive.
Even suppliers are easier on companies with a good reputation. They are less afraid of risks when working with you, which may lead to lower monitoring risks.
And of course, research after research has shown that companies recover from a crisis faster if they have a solid reputation.
How long exactly does a good reputation boost your profits? Well, for about six years if your reputation is mostly due to the residual (or non-financial) factors, Roberts and Dowling said.
Firms that also had an above-average financial reputation outperformed the average-reputation firms for at least eight years.
A final word of warning: A good reputation can actually become a handicap when firms start buying into their own PR.
Researchers from MIT found that while firms with strong cultures have a more reliable performance in stable climates, they don’t perform so well in volatile environments.
While reputation can become an “unfair advantage,” the advantage can be lost when a firm starts taking its reputation for granted or when conditions change.
We see it sometimes inside firms–the company is so smitten with its own culture and reputation that it becomes a bubble of groupthink. Internal and external criticism is minimized as coming from people “who don’t understand us.”
In the end, you end up with a lot of like-minded people who are asking themselves why they have no friends. There’s a name for groups like that: We call them cults.
I think there’s a big role for the corporate communication department to monitor the reputation as well as the culture and try to emphasize the importance of registering dissenting voices –both on the inside and out–and really listening to them.
—Raf Weverbergh is the founder of Mustr, an online tool for corporate communication managers and PR agencies. He is also the cofounder of corporate communications agency FINN PR, where he has helped startups like Deezer, Co.station, and Ancoa, as well as corporate clients like Michelin, Barry Callebaut, and Pfizer to build and maintain their reputation. Follow him on Twitter.