Author: Patrick Trottier

What is reputational capital? How important is an organization’s reputation? Why is it important? What is its value? What is a key determinant of an organization’s reputational capital?

Let’s explore these questions.

Caves and Porter, 1977, describe corporate reputational capital as both an intangible asset and a source of strategic competitive advantage that enhances a corporation’s long-term ability to create value. (Caves, R. E. and Porter, M. E., 1977, From entry barriers to mobility barriers, Quarterly Journal of Economics, 91, 421-434.)

The Value Of Reputational Capital

From the following citations, it seems that reputational capital has extremely high value in regards to corporate loyalty, competitive advantage, financial stability, and growth.

“Delivering functional and social expectations of the public on the one hand and managing to build a unique identity, on the other hand, creates trust and this trust builds the informal framework of a company. This framework provides ‘return in cooperation’ and produces (positive) reputation capital. A positive reputation will secure a company’s or organisation’s long-term competitive advantages.” Reputation Capital: Building and Maintaining Trust in the 21st Century, Klewes, Joachim & Wreschniok, Robert (2010).

“Reputation capital is a corporate asset that can be managed, accumulated, and traded in for trust, legitimisation of a position of power and social recognition, a premium price for goods and services offered, a stronger willingness among shareholders to hold on to shares in times of crisis, or a stronger readiness to invest in the company’s stock.” Reputation Capital: Building and Maintaining Trust in the 21st Century, Klewes, Joachim & Wreschniok, Robert (2010).

A good reputation is more valuable than money.
-Publilius Syrus

Reputational Risk

In Harvard Business Review, Reputation and Its Risks, Robert G. Eccles, Scott C. Newquist, Roland Schatz, February 2007 Issue names three elements determining the extent to which a company is exposed to reputational risk.

1. Reputation-reality gap
For example, reputation-reality gaps concerning financial performance often result in accounting fraud and (ultimately) restatements of results. Computer Associates, Enron, Rite Aid, Tyco, WorldCom, and Xerox are some of the well-known companies that have fallen into this trap in recent years. Another example would be Volkswagen using software to manipulate exhaust emissions during government testing.

2. Changing beliefs and expectations
The changing beliefs and expectations of stakeholders and customers are another major determinant of reputational risk. When expectations are shifting based on corporate statements or brand marketing but the company’s DNA stays the same, reputational risk increases. (Research In Motion is a classic example of this).

3. Weak internal coordination
Another major source of reputational risk is poor coordination of the decisions made by different business units and functions. If one group creates expectations that another group fails to meet, the company’s reputation can suffer. A classic example is the marketing department of a software company that launches a large advertising campaign for a new product before developers have identified and ironed out all the bugs.

We’ve all read the headlines of corporations that have virtually downgraded or destroyed their reputational capital, such as Research in Motion, Wells Fargo, Volkswagen, Microsoft, Sears Auto Centers, BP and, recently, United Airlines and Uber.

What are the costs in time, money, connections, growth, and so on? What underlies these grand mistakes that have such negative consequences in so many ways and on so many levels?

How organizations deal with their mistakes can be as critical, or even more severe, as the initial mistakes themselves.

Culture and Reputational Capital

Patrick Trottier and Associates, 2017

The diagram above attempts to describe how organizational culture is the foundation to create quality products and services as well as the capability to build effective relationships with an organization’s customers, employees, community, financial institutions and its potential marketplace.

Positive, consistent interactions and ‘experiences’ with an organization, by both internal and external people, results in gaining trust and value with that organization. Such trust and value, built up over time as an extension and a reflection of an organization’s culture, becomes the key determinant of an organization’s reputational capital. Thus, everything stems from an organization’s culture—positive and negative.

Culture is a business strategy.

Four Specific Gains

Developing a positive culture as a foundation for creating reputational capital can yield these gains:

1. Attracting and Retaining Capable People
The general question by capable people who want to work with good organizations is simple; “What is it like to work for XYZ organization.”

It is no longer a secret on what it is like to work for an organization. These days such feedback is public through employee opinions which are displayed through social media sites such as GlassDoor, Indeed, Vault, and Hallway. This feedback is centered around the experiences of current and former employees with a certain organization. People now seem to find more validity in these social mediums than in the ‘official, great looking words’ on corporate web pages where every organization seems like a utopian Shangri-La.

But, let’s not rule out ‘word of mouth.’ Personal and professional contacts are still critical in getting answers to what it is like to work at a certain place, and people will give quite honest opinions about what they experience. For capable employees, retention is what it’s all about through creating the conditions where people want to stay, want to contribute, and want to have a healthy, success-based experience.

So, what is the cost to ‘attract and retain’ capable people? What is the cost to ‘turn-off’ capable people?

The main question is: What is THE underlying distinct organizational feature to attract and retain good, capable people?

Personally, I’ve known a number of people who have taken less compensation but have chosen a place where they feel wanted as a person (how revolutionary!), know that they can contribute their capabilities to the whole, and choose a place that is ‘open’ so she/he can do what they do best without ‘mom and dad’ looking over their shoulders, as well as not having structures and policies that would constrict them like a twenty foot anaconda on a hungry day.

2. Attracting And Retaining Customers and Market Share
According to Trackur, a social media monitoring tool, traditionally 96% of unhappy customers will never complain directly to the company they’re peeved with, but they will mention their complaint to fifteen or more friends. All that is now exploding rapidly with social media as hundreds and even thousands of people can be influenced about an organization by people’s positive and negative stories every day.

It is estimated that online consumer reviews are read anywhere from 67-97% by potential consumers, depending on which study you cite. People now have a voice by using on-line community-driven consumer review platforms such as Yelp, Amazon Customer Reviews, Angie’s List, Trustpilot, TestFreaks, Which?, Consumer Reports, and TripAdvisor as the most important resources for consumers looking to make informed purchase decisions based on direct customer experiences.

The ripple effect of what people experience through their interactions with an organization in terms of product quality, service and problem-solving can be immediate and enormous to their reputational capital one way or the other.

And what has the greatest influence on the quality of product, service, and experiences by the customer?

Yep! Culture.

3. Financial Support And Business Growth
“Growth, after all, is heavily dependent on investment, and a significant percentage of all investment flows through financial institutions. By reputational capital, we mean the influence in incremental (increase in) profits that accrue to borrowers when they have good reputations. Each period, borrowers have an incentive to maintain this reputation because if the reputation is ruined, borrowers lose financial opportunity in addition to these excess profits in all subsequent periods.” Financial Sector Development Policy: The Importance of Reputational Capital and Governance, Thomas Hellman And Kevin Murdoc, “Development Strategy and Management of the Market Economy,” vol. 2, eds. R. Sabot and I. Skékely, Oxford University Press, 1998.

This simply means that ‘reputational capital’ is becoming more and more a part of considerations to gain financial support and a lessening of lending rates (risk management) based on the realization of incremental increases in the bottom line. Without financial support, the growth of any business is significantly hampered. The general question for potential financial partners is simple; “What is the risk to invest in XYZ organization.”

Again, what is the underlying foundation for the opportunity for financial support and continuous business growth based on reputational capital?

That’s right … it’s the Culture!

4. B2B Reputation
“A recent Corporate Executive Board study of more than 1,400 B2B customers found that those (B2B) customers completed, on average, nearly 60% of a typical purchasing decision—researching solutions, ranking options, setting requirements, benchmarking pricing, and so on—before even having a conversation with a supplier.” The End of Solution Sales, by Brent Adamson, Matthew Dixon, Nicholas Toman, Harvard Business Review, July–August 2012 Issue. (https://hbr.org/2012/07/the-end-of-solution-sales)

The general question for potential supply-side partners is simple: “What is it like to work with XYZ organization.”

Summary 

The underlying factor in this discovery is organizational culture. Building ‘trust’ and ‘value’ through people’s experiences is paramount in creating, retaining and mending reputational capital.

“Trust takes years to build, seconds to break, and forever to repair.”
-Author unknown

It’s interesting to note that in reading many articles about ‘strategies to create, retain or mend reputational capital,’ only one mentions ‘organizational culture.’ Why do you think that is?

Can you share an experience or good story regarding the gain or loss of ‘reputational capital’? How was ‘organizational culture’ involved? What can we learn? 

I invite your comments and thoughts on social media.

An emergent approach to a living culture

I often wonder how many organizations truly put the effort into understanding how culture is fundamental to their business success and how to optimize such to bring their desired culture into the fabric of the organization.

For the sake of common understanding, let’s define culture as:

‘Influencing patterns’ that people consistently and congruently experience over time which emerge as the norms, beliefs, values and practices that guide people in their perspectives, attitudes, decisions and behaviors.’

An ‘influencing pattern’ is a contingency of interdependent patterns that begin to emerge and form into something which has an inherent capacity to influence persons and events.

I believe this is in line with Dr. Edgar Schein’s definition:

The culture of a group can be defined as a pattern of shared basic assumptions learned by a group as it solved its problems of external adaptation and internal integration…

A Living Culture

Let me also offer a fundamental principle to support the ideas presented in this write-up:

People are ‘experiential’ by nature.

People have heard all the talk, read the list on the pretty frames in the hallways that sound the same in any organization, and have attended the ‘event programs’ about its vision, desired norms, values, attitudes, and beliefs. But the reality is until they experience such, those ‘talking points’ will not become real nor internalized in people’s minds and hearts.

So how does an organization create both the conditions and the ‘influencing patterns’ that help form people’s experiences which then emerge as what is called the culture of an organization?

How does an organization embed the desired perspectives, norms, attitudes, values and practices that reflect the desired culture into the fabric of the organization?

What if …

• What if an organization is not encapsulated by the overly used term, ‘culture’?
• What if this nebulous construct named ‘culture’ is never placed under a microscope as something to be quantitatively assessed, analyzed, segmented and diagnosed?
• What if the term ‘culture’ is seldom mentioned? Rather, an organization focuses on setting the stage and the conditions for the desired culture to emerge and form naturally.
  • Serendipitously, I discovered the following quote by Dr. Edgar Schein in a recent interview with Tim Kuppler, “I’m almost tempted, when I get into a client situation or a coaching situation, to say: let’s have this entire conversation without using the word culture…”
• What if the desired culture is simply ‘experienced’ in a consistent and congruent manner over time emerging and forming the desired norms, values, attitudes and practices?
• What if certain norms, values, attitudes or practices shifted, or were distinct from the original thoughts of the desired culture? Let’s say some emerge and some evolve as the organization emerges and evolves?
• What if we can create a ‘living culture’ to emerge and evolve.

As I grow older, I pay less attention to what men say, I just watch what they do.
-Andrew Carnegie

Culture as A Core Business Strategy

Let’s explore the three following areas where people can create the conditions and influencing patterns of experiences for a desired, living culture to emerge and form:

1. The business model.
2. The business strategy.
3. The structure and design of the organization.

1. The Business Model – some considerations

Whether an organization is a start-up, or an organization that has been around for a long time which has a need to review their business model because of changes in such areas as the market, technology or a change in leadership, then what if senior people started thinking proactively about one’s company’s culture as an integral and fundamental ingredient of its business model.

Some Questions to Facilitate Awareness and Exploration of the Importance of Culture Becoming Inherent Within the Business Model:

• What business are we in? What is our business model?
• How important is culture to our business model?
• What is the role of culture in our business model?
• What does culture look like within our business model?
• What are our core beliefs? What are our values? What do we stand for?
• What does leadership practices look like in our business model?
• How do we give people experiences that are consistent and congruent with our desired culture through our structures, practices, systems, policies, relationships, and business processes?
• How does the role/design of IT/IS reflect our culture in our business model?
• How do we work together and build positive relationships with each other in our organization, with our customers, with our market, and with our supply side in our business model?

Comment: Even when you have the greatest business model, you will not achieve optimal performance if you cannot create a supportive/validating culture that becomes integrated and synergistic within that model as a whole. This is why culture needs to be embedded as an integral part of the business model canvas.

2. The Business Strategy – some considerations

Traditionally, a change in organizational culture has been written as and viewed as a unique initiative/program within an organization’s strategic plan. This sets up an organization’s culture as ‘something nice,’ or as ‘a program’ outside of the core business strategies of the organization. Thus, cultural change many times becomes ‘something we have to do as a sideline project outside of the core business strategies.’

As an alternative, what if an organization embeds their values into their core business strategies to create new employee experiences congruent with the stated values.

Examples

• Strategic Goal: Service / Product Value to Enhance ‘Reputational Capital’

To enhance product/service reputation through integrated information systems for supporting and increasing the scope of product/service knowledge, customer feedback, innovation, and decision-making at front-line staff, systems, and customer interfaces.

• Strategic Goal: IT / Front-Line Information Systems Integration

To design and implement open and integrated IT/IS systems where people/teams can design user-friendly, customized dashboards to enhance a greater understanding of, as well as their contributions to, the business as a whole system.

The purpose of a company is not to create a nice workplace culture but to function in the economy, to provide goods and services.
-Edgar Schein on Culture University

3. Organizational Structure and Design – some considerations

Most, if not in all, organizations have two basic types of structures.

1. The first one is the formal structure that describes ranks of individuals, authority/reporting channels, functional departments and the segmentation of those functions.
2. The second one is the informal structure. Whereby the formal structure shows how participants are expected to relate to each other, the informal structure is how they actually do relate and interact with each other, how work really gets done across the organization, what types of relationships are developed as well as what actual value each person/group brings to the performance of other members and to their customers.

Most organizations are still formally structured according to The Industrial Age hierarchical silos. This 19^th Century design is based on traditional authoritarian power (feudal lords and expendable serfs), upward lines of reporting, territorialism, management control of information, and expected ‘god-like,’ infallible humans at the top to follow without question. This formal structure exists for the control of resources, people, and outcomes but not necessarily adaptable to today’s rapidly changing and increasingly complex world.

In a May 2011 Harvard Business Review article, Harvard Business School professor John Kotter suggests that hierarchical organizations inhibit timely transformations, which are essential if a business is to survive in a rapidly changing environment. He suggests that hierarchies work for standardized processes but they are not useful in dynamic environments. They are slow to react to new opportunities, which often require transformative change.

To extend Dr. Kotter’s point, I believe that traditional, hierarchical structures cannot fully reflect, and may actually inhibit, the desired values, attitudes and practices that are needed to deal with the complexities, risks, competitive innovations, market changes, political changes, customer expectations and rate of change that organizations have to deal with today.

I believe that the 21^st Century needs structures that move from Industrial Age silos toward the Interconnected Age, such as collaborative, functionally integrated, value-based networks linked by integrated information and value streams, and where ‘positional leadership’ is a thing of the past. Maybe, some day, a person is not defined by their position but by their merit and character as reflective of the desired values of that organization.

How would you design an organization that would effectively function in a complex world of change and challenges? What would that look like?

The bottom-line question here for me is: How does the design of your organization reflect your values so internal and external people actually experience such in their interactions with your organization?

In Summary

Through my studies, practice, and observations, I believe that what people experience as ‘influential patterns’ over time constitutes how they perceive and define the culture of an organization.

I believe the desired culture needs to be embedded and reflected in an organization’s business model, their strategic goals, and their organizational design.

In doing so with conscious effort and guidance, the desired culture will emerge and form new norms and practices as a living organizational culture.

Bottom line: If you want to change the culture, give people a different experience.

What do you think about this approach? What can you add to this discussion? I invite your thoughts and comments on social media.

This article is adapted and shared with permission by Patrick Trottier