Tuesday 25 April 2017

Damage limitation: why firms don't always have to count the cost of a tarnished image

The controversial advert for Pepsi featuring model and TV personality Kendall Jenner
The controversial advert for Pepsi featuring model and TV personality Kendall Jenner
Richard Curran

Richard Curran

As millions of people around the world watched the video of Dr David Dao being forcibly removed from a United Airlines flight last week, you could definitely say it had become 'a bad day at the office' for its CEO Oscar Munoz.

It's the kind of reputational damage that chief executives fear the most. It was wrong. It was violent. It was public and it was caught on camera. Reputational crisis management experts will also say that Munoz made the first big mistake in his early response. His apology wasn't fulsome enough and he then needed a second bite at it to unreservedly apologise on national television.

He said two interesting things. One was that he took full responsibility for it and secondly he said it wasn't who the "family at United is".

After taking full responsibility, he then declined to step down begging the question of what full responsibility actually means.

His description of the company as a 'family' at that moment in time was laughable and further confirmed a sense that he was living on some other planet where marketing speak passes for real communication.

There is a reason why Mr Munoz is still in charge. It is because reputational damage doesn't always go hand in hand with financial damage. In this instance social media outrage was driving the agenda. News reports that United's share price had fallen by 4pc over the course of last week, made it look like it had shipped a genuine financial hit.

However, United's share price was up 2.4pc on Monday and had regained most the losses just one week after the incident had happened. United has introduced new procedures about overbooking or staff needing to get on a full flight. These are procedures which will "allow them to use common sense", the company said.

United has deeper problems than a lawsuit from Mr Dao, if its pre-existing procedures didn't allow staff to use common sense.

Despite all the publicity, this incident tells us very little about reputational damage, because the financial damage didn't follow. Apparently, 46,000 people signed an online petition for Mr Munoz to resign - 46,000 is not a lot.

Would the average consumer in the US boycott the airline over the Dr Dao incident? Bear in mind that many Americans buy their tickets through aggregated websites that choose any airline with the best value going to their destination.

A customer would have to actively pay a higher price with somebody else. In truth very few would.

Perhaps even the danger of reputational damage is over-stated by the media and by at times contrived anger on social media. Companies with terrible reputations often thrive.

US banks have been fined $321bn by regulators since the financial crisis of 2007. They have also made $1trn in profits since 2009. Perhaps banks are in a different category because reputational expectations are low, but major financial institutions with bad reputations often go on for very successfully for decades.

So, it really depends on nature of the reputational event. For example, a consumer business that has a safety issue can see reputational damage turn into financial damage immediately. A food company with a health scare has to act swiftly to protect their very existence.

And many have done this. An airline with a question mark over safety could find itself in trouble.

But look at Ryanair, a company that for decades was the subject of negative jokes, highly critical books, and generally had a bad customer service reputation. Yet, as long as it provided safe flights, at a cheap price that arrived on time, consumers didn't really care that much.

The airline's change of tack in recent years was a commercial decision driven by its own success. To become a truly enormous European airline it had to fly into major airports and accommodate families and business travellers.

This required a different attitude if it wanted to hoover up all those customers it could not get with the old approach - and this has worked superbly.

Other reputational 'crises' are born on social media but have a manufactured feel to them. Last week. Pepsi decided to pull an online advertisement which featured model Kendall Jenner participating in, what looked like, a race equality protest and giving a can of Pepsi to a policeman. Everybody smiled and the world was a wonderful place again.

The ad was seen as deeply offensive to groups protesting about racial inequality and trivialising their social aims - and in fact, it did - but advertisements trivialise serious things all the time as they create a manufactured world made of cotton wool.

Ironically, Pepsi had a much better track record on standing up for racial equality than many of its competitors. It had boycotted apartheid South Africa and the story goes that when Nelson Mandela visited the US after his release from prison he insisted on having a can of Pepsi in his hotel room rather than a Coke.

Of course a complete marketing disaster like the Pepsi ad is seen as destroying decades of "cred" in about two minutes. But how financially damaged is Pepsi? Probably very little. Its share price dipped last week but has already begun climbing back.

The hundreds of millions wiped off the market values of companies caught in a reputational cock-up is usually regained quite quickly.

Companies that have faced reputational crises in the past like painkiller Tylenol or Nestle (on baby milk formula) have tended to rebuild very effectively. Nike faced enormous criticism in the 1990s about the treatment of workers in factories in Indonesia. At one point its CEO said "the Nike product has become synonymous with slave wages, forced overtime and arbitrary abuse". It has been a massive undertaking to turn that perception around in the public mind.

The biggest reputational crisis of recent years has been the Volkswagen emissions cheating scandal. When the story first broke in 2015, it was seen as a company breaker by some, not least the 'Financial Times', which at one point suggested it could spell the end of the company.

That prediction was based on the fines it would face; the litigation costs; the cost of putting the cars right; and the fact it would have to sell its cars more cheaply to convince people to buy them.

The reputational damage to Volkswagen of being caught deliberately cheating emissions tests, was enormous. So too will be the financial cost, for which Volkswagen has made an €18bn provision.

However, its share price collapsed from €253 in 2015 down to €93 on the back of the scandal. It is now at €131. It is the number three car brand in the Irish market this year.

In the US it is offering a six-year warranty on some new vehicles. In 2015, its sales fell by 5pc and then by a further 8pc in 2016. So far this year they are up 10pc. Volkswagen will not die from this.

One company that did die was accountancy group Arthur Andersen. Having audited electricity group Enron, which collapsed in fraud and scandal, Anderson was brought down with it.

Reputational damage didn't do for Enron, it was a puff of smoke which racked up billions in real losses. However, Arthur Andersen's collapse came after it was found to have obstructed justice by shredding documents.

This was a reputational hit and financial hit that could not be fixed. Interestingly, this year a group of former Andersen executives, who now run one of America's largest tax practices, have acquired the Anderson name and are putting it into the name of their firm. They have no plans to go back into auditing however.

Reputational damage can cost a CEO his job if it isn't handled properly, but sadly, it seems to be only where financial damage ensues.

Reputational damage matters to the people who run businesses. They care about their image even if it doesn't directly cost the company money. It can affect who wants to work there and what looks the CEO gets in restaurants.

But the circumstances are rare where it will cost the CEO their job or bring the business down completely.

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