Managing controversy:
Key to corporate reputation

Peter M. Sandman

Company Director (Australian Institute of Company Directors), 14:8, September 1998, pp. 24–25.

Editor’s Introduction:

The minerals industry is being faced with increasing regulatory pressure to be open with communities. There’s the National Pollutant Inventory requiring all companies to report on a list of substances they emit to the air, soil and water. There’s the requirements under each State government environmental act to involve communities in environmental and social impact assessment. Then there’s the industry initiatives such as the Australian minerals industry’s Code for Environmental Management that requires signatories to develop community partnerships.

The difficulty for most minerals companies is working out how to tackle being open when openness hasn’t been historical. Who to speak to? What to say? How to respond to anger? How to respond to requests to share control?

But, don’t forget to ask the most important question: How do we turn a growing expectation of openness to our advantage?

The normal approach is to develop a community relations program providing community sponsorships and linking the business into community. It is a reasonable first step, but that approach doesn’t typically provide management the valuable information to help solve the big picture issues the company is facing.

A normal community relations program will probably enhance the perception of you in the community, but it will do nothing to enhance management’s understanding of the potential issues that may confront their business.

Hence, Nike missed the potential impact of the sweatshop allegations, Shell missed Brent Spar and Nigeria, Microsoft missed the Justice Department.

They could have had the best community relations programs in the world. The best way of judging likely impact is to make an assessment of the underlying outrage in each scenario through the eyes of key stakeholders. QEST and Dr Peter Sandman have developed the OUTRAGE Prediction & Management system to help management judge their “legitimacy gap” — the difference between rhetoric and behaviour. It will then be easier to plot an aligned strategy to resolve the issue.

The extent to which a company’s profitability is affected by its environmental and social responsibility is a hotly debated question. The debate focuses on two hard-to-answer questions: whether a company’s reputation on these matters reliably tracks its performance; and whether a better-than-average reputation pays bottom-line dividends.

What is not debatable, I think, is that a reputation for poor performance with respect to environmental and social responsibility significantly damages profitability.

At a minimum, therefore, wise companies do what they can to avoid acquiring such a reputation — by avoiding public controversies where they can, and settling them where they have not avoided them.

This sort of reputation management is more important today than ever before, for at least three reasons.

First, the interested public has become much bigger — especially, perhaps, for the mining industry, which not too many years ago did what it did with very little public attention. Now the interest is widespread and often critical, fertile ground for reputational conflict.

Second, critics have become more and more successful at leveraging controversies into high reputational costs to the companies they target. Their access to international networks of activist organisations, their use of the Internet, and their connections to an emerging “ethical investment” community have all significantly amplified their power. In years past, the main cost of a controversy over a particular project was usually the cost of delaying (or possibly cancelling) the embattled project itself. Now that cost often pales to insignificance compared to the reputational costs, which can ripple throughout the world and last for decades.

And third, we know a lot more than we used to know about how to predict and manage reputational problems. Some 20–30 years ago, companies saw controversies the way they saw hurricanes or cyclones: The storm comes up suddenly, the damage is unavoidable, and you clean up when it’s over. Today, by contrast, the storm can usually be predicted, then avoided, averted, or minimised.

Because of these changes, looking out for potential reputational storms is fated to become a routine part of doing business. Few companies would launch an important initiative without doing all sorts of “due diligence”: checking out the new project in terms of markets, personnel, cash flow, legal issues, etc. Reputation due diligence is joining the list.

How can companies cope with the reputational problems they encounter?

Controversies over risk are in many ways the paradigm for reputational conflicts. Suppose your mine, refinery, or smelter has upset some of its neighbours. They think living near you is more risky than it ought to be, and they want to shut you down. Here are some of the key strategies managers should be pursuing:

Stake out the middle, not the extreme.

In a fight between “terribly dangerous ” and “perfectly safe,” the winner will be “terribly dangerous.” But “modestly dangerous ” is a contender. Activists can afford to exaggerate their case; industry can’t. Move to the middle of the seesaw.

Acknowledge prior misbehaviour — repeatedly.

The prerogative of deciding when we can put our mistakes behind us belongs to our stakeholders, not ourselves. The more often and apologetically we acknowledge the sins of the past, the more quickly others decide it’s time to move on.

Acknowledge current problems — dramatically.

Omissions, distortions, and “spin control ” damage credibility nearly as much as outright lies. The only way to build credibility is to acknowledge problems, going beyond mere honesty to “transparency.” And since people don’t expect such acknowledgments, they have to be dramatic or no one will notice.

Discuss achievements with humility.

Odds are you resisted change until pressure from regulators, neighbours, or activists forced your hand. Now have the grace to say so. Attributing your good behaviour to your own natural goodness triggers scepticism; attributing it to pressure greatly increases the likelihood that we’ll believe you actually did it.

Share control and be accountable.

In the midst of a controversy, stakeholders are seldom willing to leave control in your hands or to accept your assurances that all is well. Look for ways to put the control elsewhere (or to show that it is already elsewhere). Let others — regulators, neighbours, activists — keep you honest and certify your good performance.

If this advice sounds obvious, read it again. It’s easy to write and perhaps even easy to read — but very, very difficult to implement.

The toughest barriers to implementation are organisational and psychological. Companies, like individuals, are self-esteem maximisers more often than profit maximisers. We do what makes us feel good about ourselves.

The most effective strategies for preventing and managing controversy, unfortunately, do not feel good, at least not right away. And most controversies generate outrage on both sides, not just the other side.

Having your expertise and integrity questioned is insulting; anger and injured pride go with the territory. Perhaps most importantly, the manager who single-handedly attempts the strategies listed above is likely to look like a traitor to peers and bosses — whereas standing tall for the company, even though it backfires in reputational terms, goes over very well indeed inside the organisation.

These strategies for managing controversy, in short, run counter to individual psychology and organisational culture. Companies do not adopt them unless they have made a conscious, high-level decision ... even director-level decision ... to do so.

Peter M. Sandman 59 Ridgeview Rd. Princeton NJ 08540-7601	Phone: 1-609-683-4073 Fax: 1-609-683-0566 Email: peter@psandman.com
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Managing controversy: Key to corporate reputation