Reputation risk management

 Defining reputation

The reputation risk-management perspective on CSR emphasises the impact that CSR performance can have on organisations’ reputations.

Organisational reputation has been assessed in terms of relative standing or desirability, quality, esteem and favourableness (Deephouse & Carter, 2005, p. 331). Reputation can be conceived from an economic/strategic management perspective as a resource or an intangible asset with the potential for value creation - for example, through enabling price premiums, lower cost of capital and labour loyalty. Alternatively, it can be viewed from a sociological perspective as the outcome of shared socially constructed impressions of an organisation. Therefore, reputations are both viewed as being formed on the basis of organisations’ actions, as well as constructed by others through their perceptions of those activities (Bebbington. Larrinaga & Moneva, 2008, P- 341).

It is recognised that damages to reputation can have adverse financial effects on the company and, therefore, constitute a risk for its success. From a strategic perspective, companies need to dedicate efforts for countering damages to then reputation. According to this view, reputation can be managed by companies through the process of risk identification, assessment and actions to eliminate or minimise the occurrence or consequences of these risks.

Bebbington, Larrinaga and Moneva (2008, pp. 339-341) have noted five elements of reputation to which six prominent reputation ranking studies/indices seem to focus on

  • 1 financial performance;
  • 2 quality of management;
  • 3 social and environmental responsibility performance;
  • 4 employee quality; and
  • 5 the quality of the goods/services provided.

Arguably individuals - e.g. managers, customers or investors - consider (consciously or sub-consciously) these very aspects when forming an opinion or evaluating an organisation’s reputation. However, the degree of importance of each aspect depends on the individual and the context. Consequently, in order to manage reputation risks, managers would need to consider these different aspects but note that some would have more significant consequences to reputation, depending on the context in which the company operates.

It should, however, be noted that from the sociological point of view, reputation could be such “a complex notion that may be impossible to model and study in systematic manner” (Bebbington, Larrinaga & Moneva, 2008, p. 341). This suggests that managing it could also be impossible. However, surveys of corporate practice have identified reputation management as the most common role for public relations (Bebbington, Larrinaga & Moneva, 2008, p. 341). In order to assess the feasibility of reputation management, we will later look at the results of CSR-related experiments in particular. In any case, it is important to remember the sociological point and the limitations it poses to the effectiveness of reputation management: often, it may be difficult to forecast what the stakeholders’ perceptions of certain actions will, in fact, be and how this contributes to the collective formation of reputation. This means that managers’ actions may have unintended consequences on their organisation’s reputation.

Differentiating bebveen reputation and legitimacy

Researchers acknowledge that the concepts of reputation and legitimacy have significant similarities. Deephouse and Carter (2005, p. 330) recognise both “result from similar social construction processes as stakeholders evaluate an organization”; “have been linked to similar antecedents, such as organizational size, charitable giving, strategic alliances, and regulatory compliance”; and “an important consequence of both is the unproved ability to acquire resources”. Indeed, reputation and legitimacy are occasionally used interchangeably, but they are, nevertheless, two different concepts.

For instance, Deephouse and Carter (2005, p. 329) conclude that “legitimacy emphasizes the social acceptance resulting from adherence to social norms and expectations whereas reputation emphasizes comparisons among organizations”. In other words, as Adams (2008, p. 367) points out, it has been argued that “legitimacy is more bimodal” (a company either is perceived as legitimate or not), while “reputation refers to the relative standing of organisations to one another” (meaning the companies can be set along a scale based on how good their reputation is).

However, Adams (2008, p. 367) argues that when it comes to CSR and CSR reporting, “legitimacy, like reputation, is subjective”, “stakeholders make judgments about companies relative to one another” and the perceptions of what makes companies legitimate vary amongst different stakeholder groups. Even if legitimacy can be perceived as a scale as well, a more crucial differentiating factor is that the basis of which legitimacy assessments can be made. This basis can justifiably be determined as narrower than that of reputation assessments. Deephouse and Carter (2005, p. 332) follow Ruef and Scott’s recommendation that “legitimacy assessments be restricted to those involving regulative, normative or cognitive dimensions”. Reputation, on the other hand, can be assessed on these aspects but hr addition on “virtually any attribute along which organizations may vary” that hence enable comparisons (Deephouse & Carter, 2005, p. 332). The authors offer a good example to illustrate this: the architectural merit of corporate headquarters’ buildings could impact corporate reputation, but it would be difficult to argue that this has anything to do with legitimacy (Deephouse & Carter 2005, p. 332).

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