Riku Ruokolahti: What do you lose if you lose your reputation?

“People only start to care about reputation when it’s too late,” says Riku Ruokolahti, Head of Development at T-Media and author of *The Handbook of Reputation Management*.

WHEN I say "reputation," fear comes to mind—that’s just how it is. You can’t really even talk about reputation without people’s thoughts drifting to the darkest depths of the business world. This gloomy interpretation keeps coming up, even when the intention is to talk about the positive aspects of reputation. Why are reputation and crisis so tightly linked as concepts? Couldn’t we just focus on the positive?

Moving forward with joy isn’t possible because companies have learned, through past examples, to fear for their reputation. If you haven’t been in the hot seat yourself, you may have empathized with others’ crises and felt their pain as a colleague. Add to this the fact that your only personal experience of a corporate crisis is a live role-playing game (crisis communication exercise) organized by a crisis communication consultant, and it’s no wonder you might feel a little nervous. What if we lose our reputation too?

A reputation doesn't just vanish into thin air

But what do you lose if you lose your reputation? And where does it go? In previous chapters, we went over the mechanisms through which reputation generates value for a company or organization. In a crisis, you risk losing the performance that your reputation delivers. In discussions about reputation—and especially in crises—I am constantly bothered by the idea that reputation is a binary concept. By this I mean that the conversation about reputation is often completely black and white: either you have a reputation, or you don’t.

There are two things wrong with black-and-white thinking about reputation. First: reputation is constantly evolving and exists at some level at every moment. It is never purely good or bad. Even within a statistically modeled “good” reputation, there is a vast range of different levels and abilities to generate value for the company. And many companies still do not know what level their reputation actually is at. In that case, the company also cannot have any idea of what kind of performance it might be losing. This leads to a logical inconsistency: why, in the midst of a crisis, focus obsessively on safeguarding something that the company has not previously been interested in—not even to the extent of having determined the level of that performance in the first place?

What will you lose if you lose your reputation?

I write this so bluntly because this is often the reality. We often find that we only become interested in our reputation when it is already too late. By then, it is impossible to go back in time to measure the reputation that has been gilded by memories—a reputation we consider excellent. In such cases, our reputation before its loss remains an eternal mystery.

When you analyze your reputation and the key factors that contribute to its value, you will also gain a better understanding of the associated risks—or at the very least, your company’s leadership will develop a shared understanding of the issue. This creates the conditions for your organization to understand what to defend and how to defend it when protecting your reputation.

“When you identify your reputation and the key factors that contribute to its value, you’ll also gain a better understanding of the risks involved,” says Riku Ruokolahti.

Secondly, a company’s reputation rarely disappears entirely. I often hear industry experts drive home their point by quoting Warren Buffett: “It takes twenty years to build a reputation, but you can destroy it in five minutes.” This is only entirely true in a situation where the foundation of the reputation has been built on a complete lie. Something like this: “After being married for 20 years, it turned out that my spouse had had two other families the whole time, which I didn’t know about!” Even in a case like this, however, it takes more than five minutes for a reputation to crumble.

It would be very difficult for any trusting spouse to believe the veracity of the new information just mentioned. One’s own conscience would resist even the most compelling evidence for a long time. We will return to this specific phenomenon later. Generally, companies do not set out to deceive anyone, but rather resolve the conflicting expectations and desires of their stakeholders through compromise. Corporate crises are rarely outright frauds.

The root causes of crises influence the outcome

Most crises stem from simple accidents, internal operational errors, excessive favoritism toward one stakeholder at the expense of another, or a combination of these factors. An accident could be, for example, a factory fire caused by lightning or an employee’s heart attack resulting from undiagnosed coronary artery disease. An operational error could be, for instance, a security-critical design flaw in a banking system. Favoring certain stakeholders at the expense of others is a much more complex issue. This is because we are in an area that is very often based purely on ethical interpretations. There are many recent examples of this.

For example, interest on intercompany loans from the Channel Islands may be legal in some contexts. In the context of reputation, however, it is more important to ask whether they are acceptable. When high interest rates on group loans are paid into tax havens, this effectively means that the societies where the business is conducted receive significantly less tax revenue from those operations. The business owners, on the other hand, end up with more cash in their pockets. Conflicting wishes and needs among stakeholders, isn’t that right?

Most crises start as mere accidents.

Law and order certainly provide a framework within which a company can operate. However, a moral and ethical interpretation of what is right, wrong, or simply the appropriate course of action for our organization is an entirely different matter from the legal provisions that set boundaries.

Combinations of crisis factors are the worst of all. Let’s look at some examples: management cuts corners on safety to save money, look good to shareholders, and ensure they receive the bonuses set by the board. The structure is based on wishful thinking and a forecast grounded in past experiences. Nothing can really go wrong here—it’s never happened before! And yet, completely out of the blue, an accident occurs. The aftermath can be devastating. Morally and ethically, it’s an absolutely appalling situation, but there have been plenty of these in history. The world’s most devastating corporate disasters follow this exact pattern.

Cost-cutting measures in safety systems and their maintenance have been cited as the cause of the 2010 British Petroleum oil spill. The backup system, which was supposed to shut down the well in an emergency, failed completely when the oil rig caught fire and sank to the bottom of the sea. The result was America’s largest known environmental disaster, as the drilling pipe, buried at a depth of one and a half kilometers, spewed oil into the ocean at a terrifying rate for 86 days. The actual safety measures had failed, and it was extremely difficult to stop the leak with makeshift solutions. Try managing crisis communications when millions of liters of toxic oil are pouring into the sea every day and there’s no clue how to stop the leak.

Generally speaking, a reputation isn’t simply “good” or “bad,” and a reputation earned over decades doesn’t just “vanish” into thin air.

The previous examples were extreme cases. Generally speaking, a reputation isn’t simply “good” or “bad,” and a reputation earned over decades doesn’t just “vanish” into thin air as a result of a single critical mistake. Such an act requires a significant risk and extremely weak foundations. However, these hidden time bombs have been proven to exist, and they are surely still smoldering somewhere. Surely you don’t have any critical issues that you’ve overlooked?

We are prisoners of our own delusions

You may have sat through a communications training session where, without much explanation, the following mantra is repeated: “And reputation carries you through crises. It’s like an important shield.” And so on. Sound familiar? When you hear this mantra, it’s worth asking whether it really holds true—and if so, how. In the following, we’ll take a closer look at this phenomenon.

How would you feel if you heard that a highly competent person and close friend—someone you’ve known for a long time, whom you trust completely, with whom you consciously seek to work on the same projects, and whose expertise you turn to when facing problems—had bought their degree online? That would be hard to believe, wouldn’t it? The new information conflicts with your previous knowledge or feelings, and this is uncomfortable. You feel like forgetting the whole thing.

Fortunately, it later turns out that this qualified and trustworthy friend of yours does have a degree to show for it, even if it might not be quite what was advertised. An online degree from a private institution that buys webinar lectures from the University of Oxford isn’t quite the same as a degree earned at the actual University of Oxford. But phew, luckily we got through this without too much of a fuss. It’s an official degree recognized by the EU, after all, and that’s what matters most, isn’t it? Time passes, and before long, everything is fine again. Degree-gate gets buried under the workload. Everyday life can go on as normal.

What if you heard exactly the same information about someone completely different? That annoying person who butts in everywhere and encroaches on others’ professional space with their loud, nagging? Things don’t get done when one person just wants to be in the spotlight and derails every situation by asking questions that always go unanswered. Apparently, that’s exactly the person who bought their degree online. At this point, it probably wouldn’t help much even if a piece of paper meeting some standard were found. At least not if it isn’t from Oxford itself.

I DESCRIBED TWO different contexts into which we placed exactly the same new piece of information. In this way, we laid the groundwork for examining two different trains of thought within our souls.

The first of these is cognitive dissonance. This term describes the state of discomfort a person experiences when faced with two conflicting pieces of information or emotions. Cognitive dissonance means that when we believe we know or feel something very well, we find it difficult to accept information that contradicts our previous understanding. All of this makes us feel uncomfortable. We want to pay little attention to the whole matter, or preferably ignore it completely.

The second systematic cognitive bias is called confirmation bias. Confirmation bias refers to our tendency to believe information that confirms our existing beliefs. We primarily consume facts that fit our own worldview, and through this, we lull ourselves into a complacent, know-it-all mindset. We therefore believe things that reinforce our existing beliefs and ignore information that contradicts our current views.

Confirmation bias refers to our tendency to believe information that confirms our existing beliefs.

Here’s how it works. We’re all susceptible to systematic cognitive biases and tend to judge different things completely unequally based on our own perceptions. As a rough rule of thumb, you could say that if you’re human, cognitive biases apply to you. But how do these mental games relate to corporate crises? Because of reputation. In this guide, I’ll discuss the reputation of companies and organizations as the collective perception of the company held by stakeholders. In plain language: in crisis thinking, reputation can be understood as people’s general and shared preconception of a company. Through this, the social-psychological concepts described above are directly applicable to a company.

When your company faces a reputation crisis, there are three factors that are particularly crucial to the outcome. First, there is a high probability that the public will scrutinize the physical and ethical foundations of your company during a crisis.

These issues are very difficult to fix in the heat of a crisis. What’s done is done. Second, the starting point and structure of your reputation at the very moment you step into the storm will have a massive impact on your situation when the sky falls. The third point is how you handle the crisis situation itself and the related communications. I’ll leave that for you and my colleagues, who have been honed in crisis war rooms, to figure out.

“We often find that people only start caring about their reputation when it’s already too late. By then, it’s impossible to go back in time and measure the reputation that’s been gilded by memories—a reputation we ourselves consider to be excellent,” says Riku Ruokolahti.

However, I would gently suggest that you remember to practice beforehand. If a company faces a crisis while enjoying an excellent reputation and having a solid moral and ethical foundation, it can be said that its starting point is as good as it gets. In that case, two out of the three factors affecting the severity of the crisis are on your side. Nothing new, serious, or negligent is likely to come to light when journalists and authorities begin scrutinizing the company. That inspection may even remain superficial, because your company simply isn’t an interesting target in the context of a crisis. Most people don’t want to believe unpleasant things about companies whose reputation hasn’t been tarnished before.

Even such a great starting point can still be ruined. A few careless or foolish statements in the wrong place at the wrong time can rock the boat. In a moment of crisis, the very words of company representatives can provide further grounds for scrutiny. Crisis communication must succeed, no matter how great the company may be.

Imagine a situation where a company really does have some skeletons in its closet and its reputation wasn’t exactly stellar even before the crisis. It could be a long year for crisis communicators. At its worst, the company’s name in a negative headline sells out the tabloids in a flash, and laptop touchpads wear out as clicks pile up on online news sites. At this point, journalists are responding to the public’s hunger for news by turning over every single stone that can be turned.

FORTUNATELY, A COMPANY can recover from even a serious crisis very quickly. This simply requires that the “star signs” described above are in the right position and that the company responds to them correctly. This line of thinking is also supported by the reactions of financial markets. As early as 1999, Oxford University researchers Rory Knight and Deborah Pretty examined in their book *Reputation & Value: the case of corporate catastrophes* how financial markets react to various corporate disasters. This complex study can be summarized succinctly. Financial markets quickly priced in the crises, and the actual damages were reflected in the company’s valuation. But what happened after that? Half of the crisis-stricken companies studied recovered on the stock market to their pre-crisis valuation level or higher within 50 days of the crisis. The other half, however, showed no signs of recovery at all within the study’s timeframe.

Why did half of the companies recover quickly and even reach a higher valuation level than before? After all, a crisis inevitably causes financial damage. As noted, the starting point, the causes of the crisis, and leadership during the crisis are decisive. If an organization weathered the crisis as well as it possibly could, both the competence of the company’s leadership and the company’s moral and ethical standing have been put to the test in an exceptional situation.

I’m not at all surprised that the financial markets value a company like this more highly now than they did before the crisis. A company is healthy and well-managed if it survives a crisis, isn’t it? But if it only gets a passing grade in this test, the company will be left in the dust forever. An optimist might therefore see a crisis as a situation where a company’s true condition is put to the test.

Riku Ruokolahti has written a handbook on corporate reputation and reputation management. The excerpt published here is taken from the second section of the handbook: Systematic Reputation Management.

[button url=”/trust-reputation/” size=”btn-md” style=”btn-primary” target=””]Learn more Reputation&Trust[/button] [button url=”https://reptrust.com/maineen-johtamisen-kasikirja-tilaus/” size=”btn-md” style=”btn-secondary” target=””]Order the handbook[/button]