Why reputation matters

There is a new kind of literacy needed around the boardroom table. Directors who would not dream of walking into a boardroom without being able to read a balance sheet now need to ask themselves whether they and their colleagues are sufficiently literate in the language of reputation.

Recent examples on both sides of the Tasman have demonstrated how poorly managed reputation risk can be the Achilles’ heel of an organisation, destroying hard-earned trust and millions of dollars in shareholder value in the blink of an eye.

If you are still thinking about reputation as a non-financial risk, consider the case of PwC Australia. Senior partners breached confidential Treasury briefings about new plans to tax multinational companies, sharing the information with the very organisations the Australian government was targeting, making millions of dollars in fees along the way.

A Senate inquiry is raking over the coals, but the damage is done. Eight partners, including the CEO, have left and there is a police investigation. I would wager there are more heads to roll. PwC put profit above purpose. One of the outcomes was the sale of its now disgraced government consulting business, which had A$255 million government contracts locked in, for just A$1. And that is just the start, the financial impact will continue to be felt for years.

You do not need to be a CFO to tally the costs associated with losing the CEO and seven senior partners, the drag on internal culture, and the difficulty of attracting talent going forward. The top graduates from Australia’s leading universities will be thinking seriously about their own reputations when they consider the offers in front of them this year.

It is likely PwC will end up having to pay above the market to attract the best and brightest in future. And then there is the declarations from influential clients, such as the Australian super fund and the Reserve Bank of Australia, that they will not sign any new contracts with PwC. Still think reputation is a non-financial risk?

Media cycles are now almost non- existent. News and social media are instant and that means public and customer sentiment can turn on an organisation faster than ever. Increasingly, there is an expectation that someone will take the fall. And that desire for utu is reaching into the boardroom, as we have seen in the case of Qantas’ spectacular fall from grace.

Qantas has faced a perfect storm of self-inflicted wounds. First, there was customer anger about an arbitrary deadline to use Covid-19 flight credits coupled with an impossible-to-navigate claims system. Then there was the perception Qantas was too influential in the government’s decision to prevent Qatar increasing flights to the lucrative Melbourne and Sydney markets, protecting Qantas’ commercial interests in the middle of a cost of living crisis. And the last straw was the allegation by the Australian Competition and Consumer Commission that Qantas broke consumer law by selling tickets for flights that had already been cancelled. The ACCC is seeking to impose a penalty of more than A$250m, double anything it has previously imposed.

It only took about three weeks of ongoing negative media coverage for Qantas’ share price to drop up to 25 per cent on six months ago. The Qantas board has come under sustained scrutiny, ending with an announcement that the chair is to step down and the board “refreshed”. Yet, each one of these issues was potentially foreseeable and preventable.

Qantas might be in a different place today if the board had taken the bolder step of appointing the chief executive of its loyalty programme, Olivia Wirth, to the top job, given her extensive corporate affairs and reputation management experience, rather than the more traditional route of elevating the CFO, Vanessa Hudson.

It is tempting for some to dismiss reputation as an ethereal concept. But reputation can and should be measured and tracked. Data from global reputation and insights company RepTrak shows Qantas’ reputation score for the September 2023 quarter was 63.5, compared with scores consistently in the high 70s or even 80s before the pandemic. 

The Sydney-based managing director of RepTrak, Oliver Freedman, believes reputation should be a standing item on a board’s agenda every six months. “You need to be actively tracking your reputation and directors should expect to see these scores in their board packs,” he says.

He is also adamant that reputation should be tracked across the community as a whole, not just a narrow group of customers or stakeholders, or there is a risk of missing early red flags.

Freedman also sees directors as having a role in educating investors. He says investors are starting to tune into sustainability issues that might impact an organisation but are still less likely to think about potential damage from broad-based consumer anger. “With reputation increasingly included in executive KPIs, they’re nervous about the top team potentially being rewarded for great reputation results but poor financials. That’s where an independent measurement tool that can’t be easily gamed is worth its weight,” he says.

Freedman warns directors that one of the biggest mistakes in reputation crises is boards listening exclusively to legal advice and ignoring their corporate affairs teams.

Former Air New Zealand CEO Rob Fyfe found himself in this position on the first anniversary of the 2008 Perpignan disaster. The leased Air New Zealand Airbus A320 crashed on a test flight in southern France, killing all seven people on board including five New Zealanders, and eerily coincided with the 28 November anniversary of the 1979 Mount Erebus disaster which claimed 257 lives.

How did Fyfe balance the legal and reputation imperatives leading up to the first anniversary of Perpignan when he made a historic apology to the families of victims of the Erebus disaster for the way Air New Zealand had treated them?

Fyfe acknowledged the experience of leading the airline through Perpignan made him reflect anew on the airline’s response to Erebus. “I’ve always believed that when confronted with a crisis like that you need to respond with both your head and your heart to know the right thing to do. Then you talk to your legal and PR teams about how to bring that outcome to life in a way that minimises risk to the company. It’s too easy to let the legal risks constrain you.”

Fyfe took a proposal to the board that on the first anniversary of Perpignan Air New Zealand should issue a public apology for Erebus. He describes the reception as lukewarm, although chairman John Palmer was cautiously open to the idea.

Recognising this as a test of his personal integrity, Fyfe knew he needed to understand the issues better. He contacted the wife of Captain Jim Collins, who was in charge of the flight deck on the ill- fated flight. Maria Collins invited Fyfe and his wife to dinner with her now adult daughters. He walked away knowing, “we couldn’t keep burying our heads and saying no comment as we had for 30 years”. 

Fyfe worked with his corporate affairs lead, Mike Tod, to come up with a plan. Fyfe approached prime minister John Key, with the idea of a joint apology with the Crown, as the airline was majority government-owned. But Crown Law vetoed an apology, concerned it would be an admission of fault. Undeterred, Fyfe and Tod pivoted to focus on an apology for the way the victim’s families had been treated by Air New Zealand, steering clear of any suggestion of reapportioning blame.

The apology, and a plan to offer a family representative of each Erebus victim the opportunity to travel to Antarctica, experience the last journey of their loved ones, and visit the memorial site at Scott Base, was taken back to the board. Fyfe says it took “a number of conversations” to get the directors comfortable and final approval came “very late in the piece”.

From a governance perspective, Fyfe needed the support of his board and, having sensed that initial reluctance, would have been in no doubt the stakes were high. He was in uncharted territory; it could all have gone terribly wrong. By not allowing legal consideration to kill the idea and continuing to work on creative solutions, his apology not only enabled family members to find a sense of closure after 30 pain-filled years, it enabled staff to hold their heads high again, restoring mana to the koru. The impact on internal culture was immediate and deeply felt.

A good reputation is hard earned but easily lost – that applies equally to directors, executives and companies alike. The good news is RepTrak data shows reputation scores for organisations that have experienced major events have generally recovered by the two- year mark. The bad news is their teams are exhausted, customers have voted with their feet and the competition has galloped ahead. All things the investment community takes a pretty dim view of. 

Marie Hosking is a partner at Convergence Communications; independent director Rotorua Airport; and former Head of Communications at Air New Zealand.