Does a poor reputation actually matter?

Reputational crises may not always seem to hit the bottom line but that does not mean a strong corporate reputation is not worthwhile

Take one credit crunch, an interest-rate-fixing scandal and widespread mis-selling of payment protection insurance policies and then throw in a few computer meltdowns along the way...it's surprising that the UK's leading retail banks have any customers left. Or so you would think. But the reality is that the banks that have featured in the headlines for all the wrong reasons over the past few years still boast more than 80 per cent of all current accounts in the UK. So for all the talk of the importance of corporate reputation, this begs the obvious question: does reputation really impact the bottom line?

'The answer to this question lies in the fact that organisations have multiple reputations - for something with someone,' says Rupert Younger, director at the Oxford University Centre for Corporate Reputation, Saïd Business School. 'So while the high street banks may have lost their reputation for integrity and perhaps reinforced their reputation for greed, their reputation for delivering efficient high street banking products remains reasonably untouched.'
 
This may be true but the banks' customers are far from satisfied. A a recent survey by consumer group Which? revealed that customers of the UK's biggest banks are seriously unhappy with Santander, Halifax, Royal Bank of Scotland, Lloyds TSB, Barclays and NatWest ranking at the bottom of the list of 30 banks surveyed in terms of customer satisfaction across current and savings accounts, mortgages and credit cards.
 
Nor are banks the only example of organisations that seem to do well despite the bad press. Ryanair is now the world's seventh largest airline, carrying more than 76 million passengers every year, despite a consistently awful reputation for customer service. And it is still growing, projecting an 18 per cent share of Europe's short haul passenger market within ten years up from its current ten per cent level.
 
The difference, according to the experts, is that Ryanair does not pretend to put customer service first. 'Ryanair has a reputation for delivering low cost tickets. Pure and simple. It is at the heart of all their advertising and communications activity, and consumers understand that,' says Younger.
 
Matt Carter, chief executive of Burson Marsteller UK and chairman of Penn Schoen Berland EMEA, agrees. 'Reputation is not all about good corporate citizenship but also whether your brand delivers on what it promises,' he says. 'For Ryanair, reputation is less about doing good deeds and more about delivering on its promise as a low-cost, no frills airline that gets you there on time.'
 
The risks of poor reputation
 
But such limited reputation management provides little room for manoeuvre though. 'If Ryanair's reputation on safety or reliability was threatened, you would also see their bottom line impacted,' says Gavin Megaw, director at Hanover.
 
By way of example, Younger cites how Toyota's reputation for safety came under serious attack a couple of years ago with the sticking accelerator pedal problem. 'Consumers reacted immediately, delivering a serious fall in sales activity, especially in the US, in the weeks and months after the issue had surfaced,' he says.
 
Megaw believes companies such as Ryanair leave themselves with little insulation should they face a crisis, and put themselves at risk of a serious reputational issue threatening their whole business model in the long term. 'There's no goodwill in the bank,' agrees Robert Nuttall, head of corporate responsibility and sustainability at MHP Communications. 'Playing to just one or two reputational points, such as a good price, doesn't insulate you if bad things occur.'
 
Experts believe that a good strategy considers the impact of reputational risks across markets and stakeholders while integrating reputational issues into an organisation's vision and goals. This approach, however, appears to be rare. 'Companies put in place processes but don't think deeply about how they are building a long-term systemic approach,' says Simon Whitehead, head of energy and industrials, Hill+Knowlton Strategies.
 
Indeed, many companies fail to deal with issues swiftly and often dither for days or months without doing anything. And while the reputational impact may not be immediate, the slow-burn effect could be equally damaging - witness the ongoing confusion around tariffs in the energy sector. 'There is a real need to address issues like this upfront. Tariff complexity is not good for customers,' says Whitehead. 'Energy companies are beginning to deal with this, but only as they get to yet another winter.'
 
How the rot sets in
 
Even where reputational damage doesn't directly impact consumer behaviour, underlying problems can create long-term issues. 'A poor reputation has lots of ways of hurting a business and sales are sometimes the last indicator to move,' says Carter. 'Businesses that are under attack tend to find it difficult to hire staff and less easy to find other organisations who will partner with them. The media are more likely to investigate them and regulators are more likely to intervene. Companies with poor reputations act as magnets for further problems, and these all ultimately impact on the bottom line.'
 
This may be the case with the high street banks, which are never far from the front pages of the newspapers. Barclays recently hit the headlines for posting a third quarter pre-tax loss of £47 million, after setting aside an additional £700 million to settle PPI mis-selling claims, on the same day it confirmed two new corruption investigations by US authorities.
 
Megaw adds: 'A poor reputation may not impact the bottom line in the short term. However, it does leave an organisation exposed to a reputation gap between what they are saying and their operational practices. To allow that gap to become too wide over the long term, with little positive news to insulate the organisation's reputation, creates an environment where an issue could cause a serious crisis that fundamentally hits their bottom line.'
 
Nuttall points out that, when an organisation is fire fighting on every side, it becomes ever more difficult to do anything positive because time is always dedicated to the next crisis. 'It's a huge diversion in terms of internal resources,' he says. 'I've seen that in-house myself. When these crises hit, they take a huge amount of time and energy to resolve. It diverts resources in a way that is totally non-productive.'
 
But while the banks may currently be immersed in this vicious circle, their customer bases have remained relatively steady for two major reasons: customers see switching accounts as time consuming and laborious but also cannot see a viable alternative.
 
Nuttall adds: 'If the Government hadn't bailed out the banks then they would have failed pretty quickly. But the Government did get involved and then the view was that the banks were all as bad as each other. So there's an inertia built in. Why move elsewhere if they're all the same?'
 
The rise of the alternative
 
However, there are signs that customers are beginning to differentiate between banks in terms of customer service which may work in favour of smaller alternatives. For example, HSBC owned First Direct scored 86 per cent for its overall customer service in the Which? survey compared to 46 per cent recorded by worst performer Santander. That's quite a gap.
 
And in the weeks following the NatWest computer meltdown and Barclays LIBOR rigging scandal, customer applications to smaller alternatives reportedly soared. Campaign group Move Your Money UK published data showing a massive rise in requests to switch from large high street banks to alternatives including Charity Bank, the Ecology Bank and Bristol-based 'sustainable' bank Triodos. The Co-operative Bank, which has based its business strategy around its ethical credentials, reported a 25 per cent rise in applications in just one week in July.
 
The total numbers of customers moving accounts may be small at the moment, and unlikely to worry the major high street bank, pollster YouGov predicts they could face a mass exodus next year when a new and easier account switching system is launched. It found that 29 per cent of customers are 'likely or very likely' to change banks once switching becomes easier, amounting to 14 million current accounts.
 
As the rise of smaller banks has proved, every case of reputational damage provides an opportunity for another brand to seize market share by proving that it is different.
 
The advantages of a good reputation
 
John Lewis is a good case in point. 'John Lewis has gone from strength to strength and is one of the stand out winners on the high street during a recession that has been fatal for many of its competitors,' says Megaw. He believes it has such a highly reputed brand because it never says anything that it cannot deliver while understanding the key drivers of reputation for its target market: customer service, reliability and value for money. 'They have a loyal workforce, managed through an innovative cooperative model, and a fantastically loyal customer base,' he adds.
 
But John Lewis also initially found it difficult during the early days of the recession. Its brand promise Never knowingly undersold was a serious hindrance at a time of widespread retail discounting, contributing to an 18 per cent fall in first half profits last year. Chairman Charlie Mayfield admitted in an interview with the BBC that the pledge was squeezing profits as John Lewis was forced to match competitor discounts, saying: 'Absolutely it's costing us money, but it is really important we stick to it.'
 
John Lewis then went on to invest in its biggest ever pre- Christmas advertising campaign, underlining its commitment to the price pledge, in a strategy that appears to have worked. This year it reported a 60 per cent rise in first half profits. While the Diamond Jubilee and London 2012 undoubtedly played a part, sticking to its brand promise will have reinforced its already strong customer loyalty that will support the further growth of market share.
 
Good reputation: complex but critical
 
Of course, building a good reputation does not ensure that a brand is forever safe. 'No company, no matter how good the reputation, is immune to a crisis,' says Carter. 'The issue is not about whether a crisis will happen, but how you deal with it, how quickly you can get to the heart of the problem and then how quickly you can rebuild the trust you've lost.'
 
Reputation management is complex. It sits in risk management as well as in marketing and business development. And it comes to the fore in a crisis. It has multiple layers, with areas of more or less significance for different companies - all of which may be perceived differently by consumers too. Brands may do well despite a bad reputation in one area, but to do so is a difficult balancing act which can all too easily crumble when a crisis occurs.
 
Does reputation impact the bottom line? Not always, or at least not immediately. But in the long term, a poor reputation is a dangerous beast to manage. Brands may find themselves forever having to restrain it. And even if it never gets loose, competitors may still steal their profit because they've had the luxury of time and resources to build a positive image and a really great alternative.
 
BUILDING A STRONG REPUTATION
 
1. Identify reputational risks - across stakeholders and markets.
 
2. Create a positive reputation strategy that is integrated into organisational vision and goals.
 
3. Make the chief executive and senior leadership team accountable for reputational issues. And visible when problems occur.
 
4. Respond to any reputational issues and problems swiftly.
 
5. Be transparent and consider all stakeholders - customers, employees and the media.