Bad Rap Against Your Reputation?

Here's how to fix it

Reputation. It's intangible, yet essential. It controls how people perceive you, but it's mostly out of your control. It can take decades to build, yet can be destroyed in an instant.

Just ask Tiger Woods. Or Toyota, in the wake of the "unintended acceleration" deaths.

But what exactly is a reputation, and how can you make it work for you rather than against you?

Notre Dame management professors Emily Block and Michael Mannor recently studied psychological research to explain how people perceive an organization (or person) and how firms can manage that perception. Their article "The Path Dependence of Organizational Reputation: How Social Judgment Influences Assessments of Capability and Character," which they co-wrote with Yuri Mishina of Imperial College Business School in London, recently appeared in the Strategic Management Journal.

Reputations are important, the authors argue, because an organization's stakeholders—its customers, its suppliers, its investors and its employees—make decisions on the basis of their perception of the firm.

"In the absence of perfect information about a firm's characteristics and future behavior, stakeholders use its reputations as a proxy in order to make decisions," the authors write.

That wouldn't be a problem if our perceptions always matched up with reality. Unfortunately, the authors cite previous research showing that the way we make judgments is, in part, determined by our inherent biases. That is, we tend to base perceptions on our pre-existing beliefs of what's good or bad, trustworthy or dubious, or other categories of character qualities. Further, our biases tend to favor those who have established a track record for success, a phenomenon called the "Matthew effect" (a reference to Matthew 25:29, which says those who have much will gain even more, those who have little will lose even that).

Two reputations, not one

Because our judgments are "path determined"—controlled by our biases—we consider some information more important than other information. When it comes to competence, for instance, most people give greater weight to positive cues than negative cues. However, when it comes to ethical judgments—whether somebody is a good or bad person—we give more weight to negative cues. People tend to expect good behavior and are therefore less impressed by it than by an egregious example of bad behavior.

What does all this have to do with reputation? The authors argue that reputation isn't one quality—it can be divided into the reputation for capability and the reputation for character. Capability refers to how competent people believe the company to be, while character refers to how ethically people believe the company will act. Somebody such as Tiger Woods may maintain a high reputation for capability even after his character was tarnished by the revelation of his serial adultery. On the other hand, the bankrupt solar panel manufacturer Solyndra may lose its reputation for capability while maintaining its reputation for environmental awareness.

Just as people give more weight to positive cues when it comes to competence and more weight to negative cues when it comes to morality, people judge an organization's capability differently than they evaluate its character. The authors argue that capability is most affected by demonstrations of skill, while character is most affected by demonstrations of a scandal. This means that while occasional failures of capability can be overcome, a lapse of character can be fatal.

"I think about it like a sprinter setting a 100-meter record," said Block. "Everyone now knows that you're capable of running that fast and so that's the standard by which you're judged. What do you say about a student who gets A's his whole life and then gets a B? You don't now say she's not capable of getting an A, you say she didn't try hard enough, or something was on her mind or going on in her life. So once you've established your ability to perform at a certain level … One B, eh, no big deal."

But character reputation is different. People expect companies to act responsibly, so when they don't—when Enron was found to have cooked its books, or Goldman Sachs was accused of taking advantage of its clients—the effect can be disastrous. The stakes are high for organizations because research has also shown that a negative character reputation is highly "sticky," meaning that it can be hard to get rid of.

Fight back

So what can organizations do to take back control over their reputation? Again, it depends on whether the problem is capability reputation or character reputation. In their article, the authors use the example of Hyundai, which traditionally has been perceived as a manufacturer of lower-quality cars. To enhance its capability reputation, Hyundai recently released a high-tech concept car called the Equus. The CEO of Hyundai America explained that the company wanted to demonstrate that it could build a car as well as Lexus, BMW or Mercedes-Benz. Although Hyundai will produce only about 3,000 of the luxury car per year, the point was made: Hyundai is capable of building great cars.

Although this "demonstration of strength" strategy works to enhance capability reputation, it works less well for character reputation. After the 2010 oil spill in the Gulf of Mexico, BP tried to counter the bad press by running advertisements touting its environmental initiatives. But those advertisements jarred with the images of oil-soaked beaches that people saw on television.

"When it's about your character, you don't want to say, ‘But look at all the great stuff we're doing!'" Block said. "People don't believe that. Any attempts at self-aggrandizing are viewed through the lens of that negative character, so it's essentially, ‘I'm not going to believe you when you talk about all the great things you're doing if I know you're dumping oil.'"

Instead of countering bad press with good press, the authors recommend that organizations try to discredit or suppress the negative information. The authors suggest the following tactics: "undermining the source of the [negative] cue, blocking its wide dissemination, and altering its meaning or significance. The key under this circumstance is to make the cue disappear as quickly as possible before it can do significant damage."

In today's 24-hour news cycle, responding rapidly and effectively to a scandal is more important than ever. By applying the findings of psychological research to the study of organizational reputation, Block and Mannor provide managers with scientific, empirically tested methods for crisis management.

And if you still don't believe reputation is all that important, remember Benedict Arnold. Arnold was a hero of the Revolutionary War, survived a life-threatening wound at the Battle of Saratoga, and became one of the Continental Army's top generals. But because he defected to the British, his name has become a byword for treachery.

"Once you are branded negatively, you may never get out of it," Mannor said. "And that's exactly what happened to Benedict Arnold. His whole history was revised from being a war hero to this person who was treasonous the whole time, when there's a good case to be made that he didn't become treasonous until the very end."