Reputation Guardian Supervisory Board

Competence on the Supervisory Board

According to the German Stock Corporation Act, the operational responsibility of a company lies with the board of directors. The board speaks for the company.
The board is the face of the company vis-a-vis all stakeholders. This, however, is only half the truth. The legislator and internationally lived governance have gradually made the supervisory board more and more accountable. lt is also much more responsible than before for the external image of the company among its stakeholders.

When the code says that the management board shall inform the supervisory board of any issues relevant for the company, particularly the strategy, planning, business development, risk situation, risk management, and compliance, this also includes the company's reputation. Nowadays, the company's own reputation is counted among the risk factors of the respective enterprise in the same way as supply chains or work processes. And whoever has to be and will be informed, also has an obligation - especially from the public perspective.

Accordingly, today, supervisory boards have to be able to recognize reputation risks. In practical terms, this means that supervisory boards must not only be able to assess communication risks and opportunities, but also handle them proactively. There are many examples of companies falling into the reputation trap. One important cause of the reputation risk is the poor coordination of the decisions made by different business units and functions. lf one group raises expectations that cannot be met by another group, the company's reputation might suffer. A classic example is the marketing department of a software company launching a major advertising campaign for a new product, before the developers have identified and remedied all errors: The company then has to decide, whether to seil a defective product or launch it later than promised. Both options are bad for the reputation. This calls for decisions as to how to optimally protect it - also by means of suitable communication.

It does not even have to be a poor product. At the sandwich chain "Pret a manger'' with 450 stores on nine continents, a lacking product declaration that should have pointed to the existence of sesame, and for which there were no legal obligations, was enough. In the autumn of 2018, a 15-year-old girl died of an extreme allergic reaction, which was directly connected with the brand. Why had nobody asked the right questions beforehand?

Sometimes, a lacking crisis awareness among the management will suffice. In 2010, Greenpeace launched a campaign against the Nestle product KitKat due to the use of palm oil. On the company's Facebook page, there was a massive call to boycott Nestle, which caused the company to delete most comments and to threaten with deletion if certain contents would be posted. By doing so, Nestle had created a wide gap to its customers that was enough to miserably lose in this matter.

Luckily, there are always also positive examples of how a company manages to avert a reputation crisis by rapidly taking the right steps. An example for this is Adidas after an e-mail sent to the participants of the Boston Marathon 2017 with the text: "Congratulations, you have survived the Boston Marathon!" ... This, after the event had been the target of a terrorist attack four years before that cost several lives. The company immediately publicly apologized for the incident and declared the incident to be a mistake of the e-mail marketing team. Thus, a social media scandal could be avoided, which would have cost the company a Jot of money.

The reputation of a company is also endangered when the media only focus on a few topics, for instance, the profits and the personality of the chairperson of the board. Even if the reporting about these topics is extremely positive, a negative event outside these areas will have much more negative implications than if the company had enjoyed a broader positive media coverage before.

Assessment of a Company's Reputation

Companies should always question whether they are able to meet the performance expectations of stakeholders. The assessment of the true character of the company is often not easy: Company managements have the natural tendency to overestimate the abilities of their company and their own capabilities.

lf the realities of a company are better than its reputation, the difference has to be balanced by credible relations and corporate communications. lf, however, the reputation is wrongfully positive, the company needs to either improve its skills, its behavior and its performance or to moderate the stakeholders' perception ("management of expectations").

As reputation manifests itself in different perceptions, this perception has tobe measured. The assessment of the reputation must be made in various areas that are context-related, objective and, if possible, quantitative. Three questions have to be clarified: What reputation does the company enjoy regarding various dimensions, such as product quality, financial performance, etc.? What topics is its reputation associated with? How does the reputation come off compared with that of other companies?

There are various possibilities to assess the reputation of a company. These include media analyses, surveys among stakeholders (customers, staff, investors, NGOs) and executives, focus groups and opinion polls.

Owners and shareholders of companies are becoming more and more aware that the respective competences must also exist in the supervisory board. Only few companies take these risks seriously today. In most large companies, only few members of the supervisory board dispose of proven competence in reputation issues.

The reputation has an influence on the future success and thus on the value of the company. So, the value of a company strongly depends on how reputation risks are being handled. However, there is more than an expensive image campaign or clever branding behind the likeable image and the good reputation.

Conclusion

The management of reputation risks is no extraordinarily expensive endeavor whose implementation requires years. The biggest challenge is the realization that the reputation risk is a risk category of its own and, therefore, the responsibility cannot simply be delegated to a person or "the management", respectively.

What is needed, is an all-round vision and a strategic approach that is able to identify any part of the company, whose activities could adversely affect or jeopardize the reputation of the company as a whole. And who is better able to do this than the supervisory board? lt can maintain a more independent perspective and help to identify "blind spots" within the company. For this, it can obtain the necessary know-how externally and would be well advised to do so. For, if both the management of the company and the supervisory board rely on the same sources and the same support, a second opinion from the outside can help to alter the perspective in difficult situations. lt is not legions of consultants that are required to do this, but rather intelligent amplifiers of common sense. Already Aristotle spoke of "Wohlberatenheit" ("being well-advised") in this context. Being weil advised is neither a science nor an opinion and also not a question of the right point in time - but very much the realization that one could "treat oneself" to the time needed for obtaining advice. Thus, seeking to be well-advised is the conscious, active confrontation with and questioning of things, for which others evidently have too little time.

Coming back to Warren Buffett:

„It takes 20 years to build a reputation and five minutes to ruin it.“