THE CORPORATE REPUTATION PARADOX

Most corporate managements know that their companies' reputations play a crucial role in success or failure. They have witnessed the difficulties, and at times the collapse, of their peers due to lapses in ethics, transparency, and other areas that have become reputational flashpoints.

Technologies of the information age have made corporate misconduct more visible than ever. And declines in public regard for corporations over the last few years make reputations all the more precarious. The market can severely punish missteps that would have passed unnoticed just a few years ago.

Despite this new vulnerability, corporate managements have built little consensus on how to deal with reputation risk. Established methodologies address other kinds of risk: financial, regulatory, technological. But corporate leaders find reputation risk to be somehow different - too subjective to quantify, too difficult to get their arms around. So, too often they ignore the subject.

Over recent years, a reluctance to address reputation issues has damaged companies in such widely diverse industries as pharmaceuticals, banking, energy, telecommunications, insurance, and others. These various failures have a single failure in common: The failure to implement processes and control structures that assure acceptable conduct among far-flung workforces. Managements often perceive a trade-off between actions that instill reputationally-supportive behavior and competitiveness. But the choice they see is a false choice. And it leads them to make the unnecessary sacrifice of compromising competitiveness by ignoring reputation.

The panorama of reputational failure over recent years confirms that a hyper-competitive corporate environment can induce good people to do bad things. Furthermore, there is a stealth quality to the process of reputation loss, as the decline of corporate conduct often does not happen all at once, but rather in slow, hardly-noticeable increments.

For example, more than a few companies have given in to Wall Street pressure by manipulating earnings in one way or another to meet, or exceed, analysts' forecasts. Often it's simply a matter of advancing legitimate earnings from a future quarter into the current one. But it becomes a slippery slope over time because companies who do this generally have to push a little harder next quarter, and then still harder the quarter after that. Each manipulation seems small. But in their accumulation over time, the facts become ugly, embarrassing, and may reveal illegality in actions taken to keep the ball rolling.

Call it culture drift. NASA identified a similar phenomenon in investigating its two shuttle disasters. In one, it had allowed known irregularities in a seal called the "O" ring to persist. In another, it failed to address the separation from the craft of heat shield material. In both cases, astronauts had flown successful shuttle missions in the presence of these out-of-spec conditions. They therefore became acceptable - until, of course, they ended in cataclysm. NASA came up with a term to describe this lazy acceptance of the previously unacceptable: They called it the "normalization of deviance." It is a perceptive concept that also applies to companies who believe that, since they have survived reputationally risky practices so far, they have achieved a certain immunity from their effects.

Misconduct becomes "normal" in an organization when managers spend too much time listening to each other in the absence of outside voices. The paradox in the title of this piece refers to the fundamental nature of reputation - that it begins and ends with the opinions of others. So, it is different in kind from all those spheres of activity that the corporation can control: strategy, tactics, and structure. And that's why reputational considerations are so often ignored. They require a listening that can seem foreign to the aggressive, narrowly-focused mindset usually associated with business success. Yet their incompatibility is an illusion. You don't have to choose between a strong business and sound reputation.

Every management team must recognize its own need for reality checks, which must take the form of dialogue with groups affected by the company's actions. These groups include communities, regulators, NGOs, investors, and others. The task is to understand the thinking of those people and institutions who can determine your destiny. Qualitative perception studies, which are primarily solicitations of viewpoints and ideas, also give management perspective on its own blind spots. "Inclusion is everything," said a politician trying to put together a diverse coalition. In corporate life, it is a crucial ingredient for survival.