Chapter 6: Tallying Up Reputational Effects - Building Reputational Capital: Strategies for Integrity and Fair Play That Improve the Bottom Line [Electronic resources] نسخه متنی

Chapter 6: Tallying Up Reputational Effects

Overview

So far, we've been talking about organizational design features that tend to build corporate reputations. You may be wondering if there's some way to predict and evaluate the reputational impact of your firm's business activity to help guide specific business decisions. This chapter sets out a method, or calculus, that allows you to estimate reputational effects. The process is straightforward: You consider the probable positive reputational effects a business decision will bring to everyone concerned and subtract the anticipated negative reputational impacts. You compare that total with the amount resulting from alternative courses of action. Although business decisions are normally quite complex, involving a consideration of many factors, the calculus helps you hone in on the target, choosing the course of action that maximizes favorable reputation and minimizes unfavorable reputation. Like a utilitarian moral analysis that calculates the "greatest good for the greatest number" by comparing the amount of pleasure versus pain generated by alternative courses of action, you consider all the projected consequences of business decisions that bear on your organization's probity: both immediate and remote, direct and indirect, short-term as well as long-term.

A direct tallying of the reputational impact of business decisions is, to some extent, more relevant to the actual world of business than using conventional models of ethical decision making, that is, those that evaluate conduct according to its tendency to maximize community welfare, promote justice, conform to social contract-based norms, or display moral virtue. This is so because businesses operate principally out of self-interest, making decisions that maximize the wealth of the firm.

Pundits might worry that directing our efforts toward reputation-maximizing decisions instead of, say, pursuing rights-respecting or welfare-maximizing conduct may sometimes lead to unethical choices being made. I disagree. The action that promotes a firm's reputation (civic involvement motivated by a genuine concern for the plight of the urban poor)—as opposed to its image, which indeed often can be at odds with the firm's authentic character (civic activity cynically undertaken to divert attention from accounting improprieties)—will almost always be the one that touches the hearts and promotes the welfare of people. I have yet to find a single instance where behavior that benefits a company's reputation does not at the same time amount to doing right, all things considered. The defense Lockheed president Carl Kotchian gave of his decision to bring suitcases full of cash to Tokyo to bribe the prime minister of Japan in order to win approval for a jet contract[1] was premised on a utilitarian moral analysis, albeit an attenuated one. He argued that paying a bribe would keep his company out of bankruptcy, benefit the prime minister, create wealth for the company's shareholders, and allow employees of the firm to hold on to their jobs. While it has been pointed out that his reasoning stopped short of factoring negative consequences for other stakeholders, such as competitors and the citizens of Japan[2]—I believe it is significant that the probable long-term reputational ramifications of the decision to pay a bribe were utterly absent from Kotchian's analysis. Indeed, most business ethics textbooks offering a utilitarian model glide right over such considerations.[3]

On the other hand, the "front-page-of-the-newspaper test"—which asks how a decision would be portrayed in a headline—is widely promoted as a quick test for ethical decisionmaking in business precisely because it captures the reputation dimension.

Suppose, for instance, your company faces these business decisions:

Decision #1:

downsizing the workforce with no regard or assistance for terminated employees

versus

downsizing with compassion for terminated employees

Decision #2:

reincorporating the company in an offshore tax haven to cut worldwide tax bill

versus

staying put

Standard business ethics evaluations of these situations, although certainly sensitive to the reputational aspects, would center around asking questions such as: What is your firm's obligation in this case? Which choice promotes the greatest good?

I believe that those are important questions for businesses to consider. But business is not just about being ethical. (Not to mention that pinning down exactly what's "ethical" and what's not is often exceedingly difficult.) It's also about being profitable. And it's hard for businesspeople to make the linkage between their conduct and ethics directly. This is why I believe that reputation is the missing link between business and ethics. Making decisions that build your company's reputation (and your own reputation as well) serve to improve the bottom line directly, which is what businesspeople are trained to do. The decisions that build reputation turn out to also be decisions that promote ethics and demonstrate respect for the letter and spirit of law. But what's so important to recognize is that choosing to build reputation is making the right business decision—it's as much a business decision as allocating money for advertising and capital improvement. In fact, reputational capital is itself a form of capital, an intangible asset. If it bothers you that it seems difficult to quantify and track down the benefits that will come from undertaking practices that enhance reputation (for example, from building goodwill in relationships with key constituencies), consider that in advertising, you don't necessarily know in advance exactly what impact particular ads will have on target audiences. Certainly, surveys and market research guide decisions, but neither one lends itself to precise, certain predictions of outcomes. Once I came to this realization, all of the analysis I had done on business ethics started to appear in a totally new light. With the fresh perspective of building reputational capital we see that, in truth, there is no fundamental contradiction between ethics and economics. Steps your company takes to build its reputation are at the same time the soundest long-term investment it can make in terms of satisfying its objectives of wealth maximization for shareholders and other key constituencies.

Granted, measuring reputation is not totally precise, but at least it is more measurable than something as effusive and endlessly disputational as "ethics."

So, let's see how the reputation calculus addresses these decisions.

Remember, the key question is not: What is your firm's duty? Nor: What action will bring about the greatest good for the greatest number of those affected? Rather, it is: Which course of action—downsizing brutally or with compassion—will maximize the reputation of the company and accordingly lead to the formation of reputational capital? Granted, this depends on whether word of the firm's behavior gets out, and whether it is criticized to the point where its reputation suffers. For small, unknown companies, this is probably not a key issue.

Now, I believe, we are in a position to make a rational business decision without bringing in such obscure and unmeasurable concepts as duty or obligation. Let's walk through some sample reputation calculations. We'll assign numbers to represent relative gains and losses to reputation (for example, "plus five" or "minus two") with the understanding that all this is meant to be illustrative only, so no matter if people form different opinions about the specific magnitudes that should be assigned for these problems. Since everyone will bring different numbers to the equation, depending on their own values, I encourage you to assign your own numerical values based on your best estimate of positive and negative reputational impacts in each of the scenarios we are analyzing. The point of all this is to sketch out a method for you to adapt to your company's own circumstances. And bear in mind that such rough assignments of value to reputational effects don't occur in a vacuum. In other words, many specific conditions (such as the size of the available labor pool in the downsizing example and the degree of notoriety of the company in the reincorporation example), all of which cannot be taken into account in our simplified examples, will impact outcomes. Also, any given behavior may be taken to be highly inappropriate for one type of firm (say, a large investment bank or asset manager) yet deemed acceptable for another (a small manufacturing company, for instance).

[1]See C. A. Kotchian, "The Payoff: Lockheed's 70-Day Mission to Tokyo," Saturday Review (9 July 1977): 7–12. In 1977, Lockheed Corporation was implicated in paying $12.5 million in bribes to Kakuei Tanaka, then prime minister of Japan, to facilitate its sale of aircraft to All Nippon Airways.

[2]See, R. T. De George, Business Ethics, (5th ed. Upper Saddle River, NJ: Simon & Schuster, 1999), pp. 73–76.

[3]The neglect of reputational impact is even more pronounced in deontological or rights-based approaches.