The situation faced by BP as the oil spill in the Gulf of Mexico ran on for weeks with increasing amounts of pollution washing ashore was a collapse of its reputation due to operational failures in the original oil rig accident and the subsequent cleanup effort.
The stock price plunged as the oil producer, which can trace its origins back to 1908, faced a battery of legal and liability claims that threatened to empty even its very deep pockets.
Companies sometimes have to adopt massive and costly measures to stem the threat of reputational risk. In late 2009 and early 2010, Toyota had to recall some 9 million vehicles after a number of fatal accidents were attributed to unintended acceleration. The auto giant also had to suspend sales of several models while fixing the problems.
Banks, the quintessential managers of risk, have wrestled with the problem of how to measure reputational risk and how to safeguard against it. Many banks consider it an effect of failures in the three major risk categories – credit risk, market risk, and operational risk, says staff writer David Benyon in a specialist publication on bank risk management.
But operational risk itself was considered impossible to measure just a decade ago, Benyon adds, so that some risk managers anticipate an evolution in assessing and managing reputational risk.
Goldman Sachs acknowledged the issue in a filing earlier this year with the Securities and Exchange Commission after a spate of negative publicity about its actions in selling the mortgage-backed securities blamed for causing the 2008-09 financial crisis.
The “adverse publicity … can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations,” Goldman said in the filing.
The Spanish bank Santander spent an estimated 500 million euros in early 2009 to make good the losses by investors in one of its funds that placed money with Bernie Madoff, an investment manager who pleaded guilty to running a Ponzi scheme that led to investor losses of some $50 billion altogether.
Sometimes these efforts fall short and lead to the company’s demise, as was the case with Enron and Andersen. In June 2010, the security firm Blackwater put itself up for sale after various efforts to repair damage to its reputation from actions in Iraq were unsuccessful.
A roundtable discussion at the Association of Insurance and Risk Managers in April found that risk managers overwhelmingly agree that reputational risk is important to their organizations, but only 6% felt they were leaders in this field.
While Toyota seemed on the road to recovery after its decisive action, the eventual fates of BP and Goldman Sachs remained to be determined in mid-2010. What was certain is that corporate risk managers will be paying more attention to reputational risk.
“Why chatter matters,” by David Benyon,OpRisk & Compliance, January 2010.
“A good name? Priceless,” Strategic Risk, April 1, 2010
Heard from Basra: “What on Earth were the British doing here? Wasting their time, wasting their money and wasting their lives.” Not CB’s words, but sentiments expressed by the people of Basra, passed on by a senior and highly regarded BBC correspondent who has spent years reporting from the streets of Iraq. (for the original audio – Radio 4 Today programme at 0738 on 30 Apr 2009)
The British Army is leaving Iraq – an Army steeped in tradition and arguably recognised as one of the best fighting forces in the world. It is, by and large, well respected and has an admirable and solid reputation. Only last summer, IPSOS-Mori polling gave an 80% favourable or mainly favourable (UK only) to the question “How favourable or unfavourable are your opinions and impressions of the British Army?” Fine stuff indeed, and fully endorsed by CB3.
However, reputation is a fickle entity and never guaranteed, no matter how strong your ‘brand’.
The line has often been used that the difficulties and struggles faced by the British military have been caused by politicians (the Labour government) who have sent them on unsuitable missions, under-resourced and often out-gunned. The concept of serious problems within the Army, are not new, as Newsnight’s September 07 programme ‘Broken Army’ proves. And Deep Cut, Royal Navy Iranian hostages, with its own media debacle (not Army but still people in uniform), and abuses of Iraqi prisoners, have also raised eyebrows (putting it mildly!), here and internationally. However, recent media coverage, such as Stephen Grey’s Dispatches – Afghanistan: Mission Impossible?, and several print articles have further eluded to failures within the military itself. While Con Coughlin concedes that the damage to the Army’s reputation is real, albeit of government making, Christopher Brooker is particularly forthright:
“The British Army had entered Iraq in 2003 with a reputation as ”the most professional in the world’’. Six years later it will leave, having failed to fulfil any of its allotted tasks and having earned the contempt of the Iraqis and the Americans after one of our most humiliating defeats in history.”
Now, of course, headlines and op-eds and the occasional documentary do not automatically reflect genuine public opinion but let’s look at a hypothetical timeline over the next eighteen months:
- American money pours into the south of Iraq, infrastructure improves – Narrative in Basra: ‘It’s getting much better now the Americans are here’, possibly reading as ‘the British Army failed’.
- Afghanistan remains slow progress, but the Obama administration wants a good foreign policy win, and points to Iraq – Narrative in the US: ‘We’re suceeding in Basra’ i.e ‘where the British Army failed’.
- Maliki wants to capitalise on sucess in Basra – Narrative:, with American support, the Iraqi government is improving the lives of Baswaris’, read as ‘where the British Army couldn’t’
- Domestically, the Conservatives, wishing to win marginal seats in garrison towns during the general election (remember this is hypothetical), make a campaign push on defence – Narrative ‘We will rebuild a ‘broken Army’, read as ‘the Army is broken’.
- Overall narrative: ‘The broken British Army failed in Iraq’. And a sustained narrative like this may well affect public opinion.
Okay, so that;s all hypothetical, but the point here is, regardless of a failure to resource the Army for its mission and the fact that any chance of success in Iraq was also down to several government agencies who do not wear combat uniform, under the circumstances above, the Army, the most visible of British involvement, may end up taking the hit long after they have withdrawn. The US Army took a generation to really get over the damage that Vietnam did to its reputation, despite its many successes (i.e. the massive Tet offensive was successfully repelled, effectively a massive US victory but was seen as a PR disaster).
CB3’s hope and hunch is that this won’t happen for the British Army. But a recent conversation with a retired British Lieutenant-Colonel, who could not ever see circumstances in which the Army’s reputation would be tarnished, got CB3 thinking. That well earned reputation is not guaranteed, and must be attended to just as much after the event (Iraq) as during it. Resting, literally, on laurels just won’t cut it.
Further, there are lessons here for others. Let’s not forget, other militaries are appearing to limp home from Iraq. They have reputations to think about too.