You'd Better Give a Damn 'Bout Your Bad Reputation, and Here's Why

Last Updated Apr 15, 2011 12:38 PM EDT

No, most corporate CEOs aren't Joan Jett. But somehow many of them keep acting as though they'd like to be.

Executives at Transocean (RIG), forever associated with the death of eleven employees and the biggest oil spill in American history from its Deepwater Horizon facility, continued to cement their reputation for poor judgment and overall cluelessness. After awarding themselves bonuses for the "best year in safety performance in our company's history," the executives belatedly announced that they were "voluntarily" donating the safety bonuses to the Deepwater Horizons Memorial Fund "because we believe it is the right thing to do." (All that criticism had nothing to do with it, of course.)

Berkshire Hathaway did much better when it had to answer some pointed questions after the abrupt departure of the likely successor for the legendary Warren Buffett. Target (TGT) customers must walk past protesters who object to the company's contributions to an anti-gay politician. Johnson & Johnson (JNJ), once the gold standard for reputation protection following the Tylenol poisoning of 1982, found a story about its "quality catastrophe" on the cover of Business Week earlier this month.

Your reputation is your biggest asset -- and also your most fragile
Every week there's another example of a company scrambling to prevent a catastrophic loss of its most important asset -- its reputation -- whether the problem is financial, strategic, operational, or ethical. Maureen Errity, co-chair of the Deloitte Center for Corporate Governance at Deloitte Services, says, "Managing reputational risk does not fit into any category; it is ingrained in each of them."

I recently had the opportunity to chat with Jonathan Low of Predictiv Consulting to learn more about managing this kind of reputational risk. Here's an edited transcript of our discussion.

How should boards of directors evaluate reputational risk?
Boards must address reputational risk as they would any other threat to shareholder value that could result in loss of the institution's license to operate. When one looks at the loss of shareholder value suffered by major global public companies such as Toyota (TY), BP, Goldman Sachs (GS) and AIG in the past year, all largely due to loss of confidence based on management performance, it becomes apparent that reputational risk is significant.

It is so closely intertwined with enterprise risk that for boards to ignore it or worse, to dismiss it as a public relations matter, will simply cause additional pain as hedge funds, journalists and others probe for additional weaknesses.

Paying CEOs to guard the company's rep»
  • Nell Minow

    Nell Minow, a member of the board of GovernanceMetrics International and founder of The Corporate Library, writes about corporate governance issues, focusing especially on CEO pay, executive compensation, shareholder rights and best business practices.You can follow her on Twitter at @nminow.