Environmental, Social & Governance Briefs

On Governance: How a Board Shapes and Protects its Reputation

April 18, 2019

On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve to spark discussion on some of the most important corporate governance issues.

In the past 40 years, there’s been a dramatic shift in how companies are valued. The traditional model—where physical and financial assets make up the lion’s share of a company’s “value”—has been turned on its head. 

Now it’s the intangible “other factors”—i.e. reputation [good will]—that sets a company apart and makes investors, analysts, and the media take notice. The Reputation Institute recently published an estimate that nearly 84 percent of a company’s value is now based on reputational factors. What if they are only half right?

As corporate boards become more transparent, the board’s values, standards, and priorities are more fully on display. These characteristics provide the opportunity for senior leadership, investors, and the broader business community to observe and assess board leaders as well as the company in general.

Reputation management has become increasingly important for boards of directors. Reputation can provide virtually free “lift” or create hard-to-shake “drag” for a company’s valuation, its political/social standing, and access to commercial pursuits. Clearly, reputation “moves” balance sheets these days….

• BP lost 55 percent of its shareholder value following the 2010 Deepwater Horizon scandal.
• United Airlines’ forcible removal of an overbooked passenger in 2018 cost the airline $1 billion in market values during a 48-hour period.
• Volkswagen saw its value drop by 38 percent due to the 2015 emission scandal.
• Elon Musk’s awkward outbursts have damaged the brand’s reputation. Tesla experienced a 19 percent stock drop in the first three months of 2019.
• Facebook has fallen to 98^th of 100 large companies in its reputation management score due in part to mismanagement of data privacy, fake news, and employee relations issues since 2016. Consider: do you want your son or daughter to join Facebook as an employee?

This article covers those critical situations where reputation is formed by the conscious decisions of directors and put on display for shareholders and stakeholders to see, assess and be influenced by. The building blocks of reputation are discussed below.

1.    Consistently perform

This is an easy one! If a board is concerned with enhancing shareholder value, it should be concerned with the business impact of corporate reputation. Moreover, if a board is concerned with the firm’s image, maximizing shareholder value is not a bad start.

Some companies occupy a relatively narrow reputational “space.” Their reputations are built largely on their financial performance. Others find their reputation is formed more broadly on issues including process capabilities, community outreach, and activism. So, reputation management tactics may need to be tailored somewhat to a company’s sector.

2.    Keep track of your promises

No personal characteristic is more basic than trustworthiness. And the recovery from a breach of trust is the most difficult to recover from.

One’s reputation is largely defined by perceptions of trustworthiness. In the scope of board function, trust is typically presumed, rarely developed, and yet often misjudged as sound and dependable. While most directors have matters of trust on their radar due to their personal maturity and business experience, they are largely untrained in assessing, building, and repairing trust—the key building block for board effectiveness. Companies including Volkswagen, Takata, and Uber have taken big reputational “hits” as well as sharp market valuation declines.

In the past, trust may have been “prewired” on a board since refreshment was guided by existing relationships between executives. This is less likely today with directors sourced from more independent, diverse candidate pools. Yet even today, boards rarely practice building authentic trust, probably because it seems too elementary to garner director attention.

3.    Manage demeanor in face of pressure, conflict, and crisis

Consider Tesla founder and CEO Elon Musk whose recent demeanor exhibits disruptive and haphazard behavior. Brilliance may not be enough to protect the Tesla brand and save his job.

Demeanor is an individual’s outward facing behavior. Demeanor tells a story about the degree that you as a person and as a leader offers confidence, control, caring and passion. If a director struggles to keep a consistent demeanor, reacts haphazardly to situations or can’t control emotions, his/her ability to influence is diminished, board collegiality takes a hit, and the decision-making process suffers.

Boards don’t need nor should they want this kind of publicity. Best to stay on the “bright” side of issues and crises rather than get mired in the “dark side” on blame, acrimony, defensive thinking, and its commercial implications.

4.    Cede the spotlight to senior management

A director’s role is to provide thoughtful guidance to senior management and sound governance for the management of the enterprise – not to stand out and shine for stakeholders. Most of the time, a board’s job is to work behind the scenes with prudent deliberation and guidance to senior management. When a director edges toward a more public, visible role, he or she may, indeed, forge a reputation but not a governance reputation and these behaviors intrude in the way of senior management fulfilling its inside and outside responsibilities.

For senior leaders who find themselves in board positions, this ceding of the spotlight may be a challenging departure after a lifetime of external engagement and visibility in prior corporate leadership roles where success has been achieved and where “stepping forward” was the expected behavior. Some easily make the transition toward being a fiduciary; others require coaching and reminders to stand strong behind senior leadership, not in front of them.

5.    Be well-networked and connected

A key benefit of external networking and connectedness is the ease of gathering external information about market trends and competitive actions. These better-connected directors are effective “listening posts” as well as messengers. High performing directors tend to think more strategically about personal relationships, positioning themselves at key communication points within cross-organizational networks. In doing so, they can be more effective both within and outside their boards. They are often prudent in maintaining the balance between what they ask for and what they contribute to their network relationships so these relationships remain healthy.

Better connected directors may serve on multiple boards. So choosing a director includes not just assessing skill and experience but also his/her connectedness.

Those boards with directors who are better connected than competitors in terms of the quality and quantity of their external relationships are found to have higher firm valuations.

6.    Remain professionally current

Wisdom has a half-life. It must be actively renewed lest a director becomes out of touch and offers dwindling value. Every chair must expect directors to offer accurate hindsight, astute insight, and perceptive foresight about markets and strategies. Wisdom is rarely renewed via osmosis.

Each director, as well as the Nominating Committee, must attend to these renewal expectations with a full and fresh understanding of facts, trends, regulatory matters, environmental, and competitive strategy and tactics. “Obsolete” directors leave a board vulnerable to emerging trends and competitive forces—companies get surprised and outflanked.

7.    Abide by board practices and processes

Every company operates along a “loose-tight” continuum with all its rules and practices. Where a board decides to be along this continuum factors into the reputation the company creates and enforces.

Regulatory, governance, and a company’s own policy and best practices are adopted and monitored by the board of directors. Policy documents, awareness training, and modeling educate directors and the rest of the organization about the underlying rationale for rules and requirements. The board must have in place monitoring and control devices to ensure policies and statutes are followed and best practices are pursued. Violations should be reported upward to the board and punitive and corrective action should be taken by the board.

The selection of rules and policies, the modeling of appropriate behavior and the discipline to enforce the rules shape the culture and reputation of the company.

8.    Offer stakeholders a compelling message. Build and protect reputation.

Boards must ensure their company has something to say about important issues.

With increasing transparency, boards must understand the interests and points of view of stakeholders and how the company stands for key issues. With this knowledge in mind, boards must ensure that public and investor relations functions offer clear messaging on matters that matter and a united front for the company as it presents “what we stand for” communications to stakeholders. It is important for boards to understand and agree on the issues the company wishes to address, and the themes for the company’s messaging so the full board is on board with the positioning and have talking points in mind.

Reputations sometimes need protecting. Boards and the senior management team must be prepared to “stand up” to distractors with information and a strong restatement of values and standards. Ignoring or “turning the other cheek” about these matters is essentially admitting defeat. Reputation will be damaged and valuations will fall. Best to have a storyline or action plan on the shelf ready to activate and provide board and senior management with the credibility and gravitas to “sell” the message.