In 30 years sitting on boards Catherine Harris has seen it all. And every board she has sat on has faced a crisis.
While reputation may not be an immediate problem for Harris’s successful family business, Harris Farm Markets, she is also a commissioner of the National Rugby League, the intensely popular, scandal-prone football code where issues involving drugs and violence are not uncommon.
“Every single board I sat on there has been a major reputational issue that has come up,” says Harris. “Of course in the NRL it is a little more regular.”
But she points to a conundrum: “The NRL might have a terrible reputation but it is still the most popular sport in New South Wales by so much it does not matter.”
The NRL is unique and most organisations don’t have a groundswell of support that can power through drama and scandal.
Marina Go is also familiar with the reputational challenges of rugby league. As chairman of NRL club Balmain Wests Tigers, she’s attempted major cultural change because unsavoury behaviour among players is so common. “I spend a lot of time on the West Tigers board saying to my directors and CEO, ‘But what will happen?’ Because we know that there will always be a negative.”
Harris and Go joined nine other directors at the BOSS-Australian Institute of Company Directors roundtable that tackled the question of how directors can handle reputational risk.
Problems into emergencies
Reputation is a valuable, sometimes unappreciated, asset. It’s a value judgment about the attributes of a business that can affect financial performance and provide a source of competitive advantage.
A good reputation can be a support base when crises occur. And the past 12 months have been replete with reputational challenges: from the Seven West financial and executive scandal to the Ardent Leisure accident at Dreamworld, the Census fail, BHP’s Samarco disaster and the RSL’s financial fraud.
The initial challenge for any organisation is to understand the difference between what it believes its reputation is and how its stakeholders perceive it. It is in this gap that crises can occur, with the febrile social media environment waiting to turn problems into emergencies within hours or minutes.
It’s not so easy to know where the risks lie. Sydney Water’s Diana Day says there’s often a failure of imagination in assessing risks to reputation. Directors should take wide internal and external soundings and engage deeply with stakeholders to learn more about their organisations, Day says.
When she joins a board, she reads everything in the media and on social media before she talks to the staff.
“It is amazing what you can pick up talking to a range of staff, to get those cues about how people feel about their work and what they are actually doing,” she says. “If the board can’t see with its own eyes what is happening downstream, people don’t really appreciate the risks or the issues until they see them.”
Flourish, a mental health social enterprise, often invites stakeholders to speak to the board, says chair Elizabeth More.
Harris, however, says directors should focus on the biggest business risks. “It would be really nice to do all that amazing due diligence, but reputational risk comes from the weirdest areas. You cannot predict anything. What I always do is focus on, ‘What is the killer for the business?’”
For example, she says, the Seven West scandal, while challenging, is not going to affect Channel Seven’s performance.
At Harris Farm, she says, “It’s food safety and our people. [If] you underpay people, we’ve seen what’s happened to 7-Eleven. If somebody gets sick from something – that’s so much of what your focus is. They are the things that kill your business.”
Consistent messages
Robert Bustos-McNeil, partner at A.T. Kearney, points out that diverse sources of opinion are crucial but the board shouldn’t forget the upside of reputation and the opportunities that a good reputation creates.
And often boards can be too narrow and stay stuck in their bubble, says More, who is also Dean of the Australian Institute of Management School of Business. “Some boards attempt to put up a little barrier and don’t show that leadership in reaching out further into stakeholder environments and shareholder environments.”
“I think it is impossible to be a governor without having some sort of sense of what is happening down on the shop floor,” says Macquarie’s Michael Coleman. But the board has to make sure its messages are consistent.
“The answer to all of this is a proper culture. We have a lot of commentary these days from regulators who are telling us that we have to make sure that we have a strong culture. But often the answer that the regulators seem to want is more forms, programs, tick boxes and things that suggest there is a culture. Whereas culture comes very much from the nature of the way that the organisation itself operates.
“So I think that we cannot talk about the issue of reputation and risk without taking into account culture.”
Peter van Dongen of PwC agrees culture is a safety valve because it helps predict the way in which businesses behave and individuals within businesses behave.
“The consequence of which is hopefully you have less crises,” he says.
Damage may be underestimated
A reputational risk audit shouldn’t be just a one-off exercise, but should be a continual activity that involves management and board members, says the McGrath Foundation’s outgoing CEO, Petra Buchanan.
“[The board] is only as empowered as the measurement and the tools and the judgments that the business is giving to it,” she says.
Nor should the reputations of stakeholders, partners and outside suppliers be excluded.
“It may be a major stakeholder that has the impact to affect your business. That’s a very fundamental area and that I don’t see enough rigour there,” she says.
The financial impact of reputational damage may be underestimated and most organisations don’t necessarily take this into account, says Balmain’s Go.
“Most organisations – and we did this – go straight to the financial risks and legal risks. But there was no conversation around the risk to reputation if any of this went wrong. Things like, what if a player punches his girlfriend?
“We had to encourage the management team to start thinking about the risk with regards to reputation because that has a financial impact. If you just start with financial [risks] you don’t naturally think of that.”
Again, culture rears its head, says Coleman. “The question that I would have is not so much, ‘What will we do if [a football player] punches [someone]?’, my question would be, ‘What do we do about trying to change the culture in the organisation so that those people find it totally unacceptable to do those things?’”
Go says Balmain’s CEO is trying to change the culture, but it’s like a game of whack-a-mole. “You put one down and four pop up. That’s what it is like at the moment with us, actually the NRL in general.
“We had a very public issue with a player who we discovered was gambling against our own team. He had been taking drugs for three years, apparently, and then there was also very personal issues with his ex-partner, and also he was selling jerseys for charity and kept the money.”
Of course the multiplicity of transgressions set the alarm bells ringing loudly. “How could he have had a cocaine issue for three years and we did not know about it? We knew fundamentally there must be gaps in our culture. We are now addressing that,” says Go.
Ethical questions
While sport has clear cultural problems that damage reputation, the business world has similar issues in calculating the right response when individuals or divisions transgress but are nonetheless highly successful.
Van Dongen says, “The relevant question is not, ‘What you do if a player goes and commits an act’ but, ‘What if the best player does?’ I think it is a situation there and elsewhere where there seem to be different rules.”
And when boards react to pressure from stakeholders, how far should it go to restore its reputation on ethical questions?
Medibank’s decision two years ago to exclude tobacco and firearm companies from its $2.4 billion investment portfolio got a level of applause, says director David Fagan. But at the last annual general meeting there was pressure to exclude coal companies.
“One thing is moved off the table and then another is put on the table,” he says. With coal, he says, “we haven’t reached a concluded position yet. What do you take out? Do you take BHP out because it has some coal interests, but it has lots of other [interests]?”
Boards sometimes take decisions that are deemed right for the long-term sustainability of the organisation but are hugely unpopular. Then the board has to decide how to manage the fallout. Macleod Media’s Louise McElvogue says its easy to become obsessed with the idea that risk can be predictable when the real quality of a board or executive is how they respond to what happens.
“It is what happens after the event. What is our communication around it, who was responding and how do we respond? Who is going to get in front of a crisis and who is going to be truly authentic?”
In a crisis, boards must know who will speak for the organisation, and if it involves the CEO, who on the board is going to step forward and run the crisis management.
Jens Goennemann, formerly of Airbus and now head of the Advanced Manufacturing Growth Centre, says often battle plans have to change when the first shots are fired but going through the plan itself is a worthy exercise.
The approach to the media is crucial, and relationships with specific journalists or media outlets shouldn’t just be left to moments of crisis, says Buchanan. “You need to have those relationships in the great and the good times and then that will allow you to have the authenticity that we spoke about earlier of being able to have a candid conversation to say: ‘Let me give you the real story here.’”
It’s crucially important not to overreact in a crisis, says Harris. McElvogue agrees. “There is nothing wrong with stopping and saying, ‘We don’t have all the facts. Here is what we think happened. We are getting back to you.’
“A lot of the large crises we have seen are people being knocked off by sideways news coming in and reacting too fast.”
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