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Executives know the importance of their companies' reputations. Firms with strong positive reputations attract better people. They are perceived as providing more value, which oft allows them to charge a premium. Their customers are more loyal and purchase broader ranges of products and services. Because the market place believes that such companies volition deliver sustained earnings and future growth, they take higher price-earnings multiples and market values and lower costs of capital letter. Moreover, in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital letter, and goodwill, organizations are particularly vulnerable to annihilation that amercement their reputations.

Near companies, however, do an inadequate task of managing their reputations in full general and the risks to their reputations in detail. They tend to focus their energies on handling the threats to their reputations that take already surfaced. This is not take chances management; it is crunch direction—a reactive approach whose purpose is to limit the harm. This article provides a framework for proactively managing reputational risks. It explains the factors that affect the level of such risks and then explores how a company can sufficiently quantify and command them. Such a process will assist managers do a meliorate task of assessing existing and potential threats to their companies' reputations and deciding whether to accept a given risk or to take deportment to avoid or mitigate it.

The Current State of affairs

Regulators, industry groups, consultants, and individual companies have developed elaborate guidelines over the years for assessing and managing risks in a wide range of areas, from commodity prices to control systems to supply chains to political instability to natural disasters. However, in the absence of agreement on how to ascertain and measure out reputational risk, information technology has been ignored.

"It takes many good deeds to build a proficient reputation, and just one bad one to lose it."—Benjamin Franklin

Consider the 135-folio framework for enterprise risk management (ERM) proposed in 2004 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a group of professional associations of U.South accountants and financial executives that issues guidelines for internal controls. Although the framework mentions well-nigh every other imaginable risk, it does not contain a unmarried reference to reputational take a chance.

Nor does the Basel II international accord for regulating capital requirements for large international banks. In defining operational adventure every bit "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events," the Basel II framework, issued in 2004 and updated in 2005, specifically excludes strategic and reputational risks. That'due south mainly because of the difficulty of factoring them into upper-case letter-adequacy requirements, most banking-risk professionals would say.

Given this lack of common standards, even sophisticated companies have only a fuzzy idea of how to manage reputational take chances. A large U.Due south. pharmaceutical company reflects the electric current land of do among well-run organizations. It has an ERM organization for managing operational and fiscal risks, as well every bit hazards from external events such equally natural disasters, that is loosely based on the COSO framework. The house's vice president of take chances direction oversees the system. However, the company manages reputational risks merely informally—and unevenly—at the local and production levels. Its leaders consider reputational risk only when they make major decisions such as those involving acquisitions. (The visitor's due-diligence process includes the evaluation of problems that could affect reputation, including pending lawsuits, weak product-testing procedures, product-liability concerns, and poor control systems for detecting direction fraud.) The risk management VP says that reputational run a risk is not included in the long listing of risks for which he is responsible. Then who is responsible? The CEO, the vice president surmises, since that is who oversees the firm'south elaborate crisis-response system and is ultimately responsible for dealing with any events that could impairment the visitor'due south reputation. This pharmaceutical business firm is not lonely. Contingency plans for crisis management are as close as near large and midsize companies come to reputational-hazard direction. While such plans are important, information technology is a mistake to misfile them with a capability for managing reputational risk. Knowing first aid is non the same as protecting your wellness.

Determinants of Reputational Risk

Three things make up one's mind the extent to which a visitor is exposed to reputational take a chance. The first is whether its reputation exceeds its true character. The second is how much external beliefs and expectations change, which can widen or (less likely) narrow this gap. The third is the quality of internal coordination, which also can touch the gap.

Reputation-reality gap.

Effectively managing reputational hazard begins with recognizing that reputation is a matter of perception. A visitor's overall reputation is a role of its reputation among its various stakeholders (investors, customers, suppliers, employees, regulators, politicians, nongovernmental organizations, the communities in which the house operates) in specific categories (product quality, corporate governance, employee relations, customer service, intellectual capital, financial operation, handling of ecology and social problems). A strong positive reputation among stakeholders across multiple categories will result in a stiff positive reputation for the company overall.

Reputation is distinct from the actual character or behavior of the company and may be improve or worse. When the reputation of a company is more positive than its underlying reality, this gap poses a substantial adventure. Somewhen, the failure of a firm to live upward to its billing volition exist revealed, and its reputation will refuse until it more than closely matches the reality. BP appears to be learning this the hard way. The energy giant has striven to portray itself equally a responsible corporation that cares about the environment. Its efforts accept included its extensive "Beyond Petroleum" advertizing entrada and a multibillion-dollar initiative to aggrandize its alternative-energy business. But several major events in the by ii years are now causing the public to question whether BP is truly and so exceptional. (Run into the exhibit "BP's Sinking Prototype.") I was the explosion and fire at its Texas Urban center refinery in March 2005 that killed fifteen people and injured scores of others. Another was the leak in a corroded pipeline at its Prudhoe Bay oil field in Alaska that occurred a year after and forced the company to slash product in August 2006. BP has blamed the refinery disaster on lax operating practices, but federal investigators have alleged that cost cutting contributed also. Employee allegations and visitor reports suggest that the root crusade of the Prudhoe Bay problem may accept been inadequate maintenance and inspection practices and management's failure to listen warnings of potential corrosion issues. Equally media coverage reflects, these events and others have damaged BP'southward reputation.

Media coverage plays a big function in determining a company's reputation. The changing mix of positive and negative stories mentioning BP in the leading British, German, and U.S. media from January 2003 through September 2006 shows how a series of events hurt the oil giant'due south reputation. During 2003 and 2004, the ratio of positive to negative stories was nearly ii to one. Notwithstanding, stories about an explosion at BP'due south Texas City refinery, declared tax evasion in Russian federation, and task cuts in Europe took their toll in 2005, when positive and negative coverage were roughly equal. Events in 2006—especially an oil leak at the Prudhoe Bay field in Alaska due to pipeline corrosion, and a subsequent cut in production—caused the number of stories mentioning BP to soar and the mix to go more negative than positive.

To span reputation-reality gaps, a visitor must either amend its ability to run across expectations or reduce expectations past promising less. The trouble is, managers may resort to curt-term manipulations. For instance, reputation-reality gaps apropos financial performance often result in accounting fraud and (ultimately) restatements of results. Computer Assembly, Enron, Rite Help, Tyco, WorldCom, and Xerox are some of the well-known companies that take fallen into this trap in recent years.

"Character is like a tree and reputation like its shadow. The shadow is what nosotros call up of it; the tree is the real thing."—Abraham Lincoln

Of grade, organizations that actually come across the expectations of their various stakeholders may not get full credit for doing then. This frequently occurs when a company'south reputation has been significantly damaged by unfair attacks from special interest groups or inaccurate reporting by the media. It besides can happen when a company has made genuine strides in addressing a problem that has injure its reputation only can't convince stakeholders that its progress is real. For instance, Chrysler, Ford, and General Motors improved their cars so much that the quality gap between them and the vehicles made past Japanese companies had largely closed by 2001. All the same, much to the frustration of the Big Three, consumers remain skeptical.

Undeserved poor or mediocre reputations tin be maddening. The temptation is to respond to them with resignation and conclude: "No matter what we do, people won't similar us, and so why carp?" The reason executives should bother—through redoubled efforts to improve reporting and communications—is that their fiduciary obligation to close such reputation-reality gaps is as nifty equally their obligation to improve existent functioning. Both things bulldoze value creation for shareholders.

Changing beliefs and expectations.

The changing beliefs and expectations of stakeholders are some other major determinant of reputational risk. When expectations are shifting and the visitor's character stays the same, the reputation-reality gap widens and risks increase.

There are numerous examples of in one case-adequate practices that stakeholders no longer consider to be satisfactory or ethical. Until the 1990s, hostile takeovers in Japan were nigh unheard of—only that was partly due to the cantankerous-holding of shares amidst the elite groups of companies known as keiretsu, a exercise that undermined the power of other shareholders. With the weakening of the keiretsu construction during the past ten to 15 years, shareholder rights and takeovers have been on the rising. In the United States, once-acceptable practices now considered improper include brokerage firms using their research functions to sell investment-cyberbanking deals; insurance underwriters' incentive payments to brokers, which caused brokers to price and structure coverage to serve underwriters' interests rather than customers'; the engagement of CEOs' friends to boards as "independent directors"; earnings guidance; and smoothing of earnings.

Sometimes norms evolve over fourth dimension, as did the now widespread expectation in most developed countries that companies should pollute minimally (if at all). A modify in the behavior or policies of a leading visitor tin can cause stakeholders' expectations to shift quite quickly, which can imperil the reputations of firms that attach to one-time standards. For instance, the "ecomagination" initiative launched by General Electric in 2005 has the potential to raise the bar for other companies. It committed GE to doubling its R&D investment in developing cleaner technologies, doubling the revenue from products and services that have pregnant and measurable ecology benefits, and reducing GE'due south own greenhouse emissions.

Of form, unlike stakeholders' expectations can diverge dramatically, which makes the task of determining adequate norms especially difficult. When GlaxoSmithKline pioneered the development of anti-retroviral drugs to combat AIDS, its reputation for conducting cut-edge research and product development was reinforced and shareholders were pleased. They were initially on lath when GSK led a group of pharmaceutical companies in suing the Due south African government after it passed legislation in 1997 allowing the country to import less expensive, generic versions of AIDS drugs covered by GSK patents. But in 2001, GSK shareholders did an about-face in reaction to an intensifying campaign waged by NGOs and to the trial proceedings, which made GSK and the other drug companies look greedy and immoral. With its reputation plunging, GSK relented and granted a South African company a costless license to manufacture generic versions of its AIDS drugs—but the harm was already washed.

Sometimes, particular events tin cause latent concerns to burst to the surface. One instance would exist all the questions about whether Merck had fully disclosed the potential of its painkiller Vioxx to cause heart attacks and strokes. Merck is embroiled in thousands of lawsuits over the arthritis drug, which it pulled from the market in 2004. The controversy has raised patients' and doctors' expectations that drug companies should disclose more detailed results and analyses of clinical trials, as well as experience in the marketplace after drugs accept received regulatory approval.

When such crises strike, companies complain that they have been found guilty (in the courts or in the press) considering the rules have changed. But all as well often, it's their own mistake: They either ignored signs that stakeholders' beliefs and expectations were irresolute or denied their validity.

In addition, organizations sometimes underestimate how much attitudes can vary by region or land. For example, Monsanto, a developer of genetically modified plants, was badly burned past its failure to anticipate Europeans' deep concerns about genetically modified foods.

Weak internal coordination.

Another major source of reputational risk is poor coordination of the decisions made by different concern units and functions. If one group creates expectations that another group fails to encounter, the company's reputation tin suffer. A classic instance is the marketing department of a software company that launches a large advertising entrada for a new product before developers have identified and ironed out all the bugs: The company is forced to choose betwixt selling a flawed product and introducing it later than promised.

The timing of unrelated decisions as well tin can put a company's reputation at risk, peculiarly if it causes a stakeholder group to spring to a negative determination. This happened to American Airlines in 2003, when it was trying to stave off bankruptcy. At the same time that it was negotiating a major reduction in wages with its unions, its board approved retentiveness bonuses for senior managers and a big payment to a trust fund designed to protect executive pensions in the event of bankruptcy. However, the company didn't tell the unions. Furious when they found out, the unions revisited the concessions bundle they had approved. The controversy price CEO Donald J. Carty his job.

Poor internal coordination also inhibits a company's power to identify changing beliefs and expectations. In virtually all well-run organizations, individual functional groups not just take their fingers on the pulses of various stakeholders only are also actively trying to manage their expectations. Investor Relations (with varying degrees of input from the CFO and the CEO) attempts to define and influence the expectations of analysts and investors; Marketing surveys customers; Ad buys ads that shape expectations; HR surveys employees; Corporate Communications monitors the media and conveys the company's messages; Corporate Social Responsibility engages with NGOs; and Corporate Affairs monitors new and pending laws and regulations. All of these actions are important to understanding and managing reputational risks. Just by and large, these groups do a bad job of sharing information or coordinating their plans.

Coordination is often poor because the CEO has not assigned this responsibleness to a specific person. When 269 executives were asked in 2005 past the Economist Intelligence Unit who at their companies had "major responsibility" for managing reputational run a risk, 84% responded, "The CEO." This means that nobody is really overseeing the coordination process. Yes, the CEO is the person ultimately responsible for reputational risk, since he or she is ultimately responsible for everything. Simply the fact of the affair is, the CEO does not accept the time to manage the ongoing process of coordinating all the activities that affect reputational risk.

Managing Reputational Hazard

Effectively managing reputational risk involves five steps: assessing your visitor's reputation among stakeholders, evaluating your company's existent character, closing reputation-reality gaps, monitoring changing beliefs and expectations, and putting a senior executive beneath the CEO in accuse.

Assess reputation.

Since reputation is perception, information technology is perception that must exist measured. This argues for the assessment of reputation in multiple areas, in ways that are contextual, objective, and, if possible, quantitative. Three questions need to exist addressed: What is the visitor's reputation in each area (production quality, financial operation, then on)? Why? How do these reputations compare with those of the business firm'southward peers?

Diverse techniques exist for evaluating a company'southward reputation. They include media analysis, surveys of stakeholders (customers, employees, investors, NGOs) and industry executives, focus groups, and public opinion polls. Although all are useful, a detailed and structured analysis of what the media are saying is especially important considering the media shape the perceptions and expectations of all stakeholders.

Today, many companies hire clipping services to assemble stories nigh them. Text- and speech-recognition technologies enable these services to scan a wide range of outlets, including newspapers, magazines, TV, radio, and blogs. They can provide information on such things every bit the full number of stories, the number per topic, and the source and author of each story. While useful in offering a real-time sample of media coverage, these services are not always authentic in assessing whether a story about a company is positive, negative, or neutral, because of the limits of the computer algorithms that they employ. They too tend to miss stories that cite a company just do not mention it in the headline or first few sentences.

Therefore, the sometime tool of clipping services needs to be supplemented with strategic media intelligence. This new tool not only analyzes every line in a story simply also places the coverage of a company within the context of all the stories in the leading media (those that set the tone for the coverage of topics, companies, and people in individual countries). Since the reputation of a company is a part of others' reputations in its industry and the relative reputation of the manufacture overall, having the complete context is essential for assessing book and prominence of coverage, topics of involvement, and whether the view is positive or negative.

Establishing a positive reputation through the media depends on several factors or practices, according to research by the Media Tenor Found for Media Analysis (founded by coauthor Roland Schatz) in Lugano, Switzerland.

First, the company has to state and remain on the public's radar screen, which involves staying above what we telephone call the "awareness threshold": a minimum number of stories mentioning or featuring the company in the leading media. This volume, which must be continual, varies somewhat from visitor to company, depending on industry and country but not on visitor size.

2nd, a positive reputation requires that at to the lowest degree 20% of the stories in the leading media be positive, no more than 10% negative, and the rest neutral. When coverage is above the awareness threshold and is positive overall, the company'south reputation benefits from individual positive stories and is less susceptible to being damaged when negative stories appear. If coverage is above the awareness threshold simply the bulk of stories are negative, a company will not benefit from individual positive stories, and bad news will reinforce its negative reputation. All companies—big or small—should care near staying in a higher place their sensation threshold. Even if a small company has a very strong reputation amidst a pocket-size grouping of core investors or customers, it runs a high risk of suffering considerable impairment to its reputation if its media coverage is below the sensation threshold when a crisis hits.

A visitor'south reputation is also vulnerable if the media are focused on merely a few topics, such as earnings and the personality of the CEO. Even if the coverage of these topics is extremely favorable, a negative upshot outside these areas will have a much larger negative bear upon than it would have if the firm had enjoyed broader positive coverage.

3rd, managers tin can influence the mix of positive, negative, and neutral stories by striving to optimize the company's "share of voice": the percentage of leading-media stories mentioning the firm that quote someone from the organization or cite data it has provided. Media Tenor'due south inquiry suggests that a company needs to have at to the lowest degree a 35% share of voice in social club to keep the proportion of negative stories to a minimum in normal times. Strong relationships and credibility with the press are crucial to attaining a large share of vox and are peculiarly important during a crunch, when a company really needs to communicate its point of view. In such times, management's share of voice needs to be at least 50% to ensure that critics of the visitor don't prevail. Merck'southward travails subsequently the problems with Vioxx illustrate the consequences of a company inadequately managing its position in the media. (Encounter the exhibit "Merck: The Perils of a Low Profile.")

Merck was ill prepared to defend its reputation when the Vioxx crisis hit. In the 33 months prior to Merck'south withdrawal of the hurting medication on September thirty, 2004, the visitor had a low profile: At that place weren't enough leading-media stories mentioning it to keep it above the public's "awareness threshold." Although 27% of the stories were positive, they were neutralized by the 28% that were negative. In addition, before the recall, a woefully inadequate seven% of stories quoted someone from the company or cited data provided past information technology, meaning Merck didn't have the "share of voice" required to communicate its positions. Afterwards the announcement of Vioxx's withdrawal, the boilerplate number of stories per month mentioning Merck more than tripled—merely 60% of the stories that appeared through September 2006 were negative and merely 13% positive. It will be difficult for Merck to rebuild its reputation—especially since its share of voice has decreased to 5.5%.

Evaluate reality.

Next, the visitor must objectively evaluate its power to meet the operation expectations of stakeholders. Gauging the organisation's true character is hard for three reasons: First, managers—business organisation unit and functional heads as well as corporate executives—have a natural tendency to overestimate their organizations' and their own capabilities. 2nd, executives tend to believe that their visitor has a good reputation if there is no indication that information technology is bad, when in fact the company has no reputation in that area. Finally, expectations get managed: Sometimes they are set up low in society to ensure that performance objectives volition be accomplished, and other times they are gear up optimistically high in an endeavor to impress superiors or the market.

As is the case in assessing reputation, the more contextual, objective, and quantitative the approach to evaluating character, the better. Just as the reputation of a company must be assessed relative to competitors, so must its reality. For case, operation-comeback targets based merely on a company's results for the previous twelvemonth are meaningless if competitors are performing at a much college level. The importance of benchmarking fiscal and stock operation and processes against peers' and those of companies regarded equally "best in course" is hardly a revelation. However, the degree of sophistication and detail equally well every bit the accuracy or reliability of benchmarking information tin vary enormously. The reasons include transcription errors (a big problem when a large amount of data in paper documents has to be manually entered into electronic spreadsheets), for example, and the disability to determine whether the way competitors report information in an area is consequent. One visitor might include customers' purchases of extended warranties in its revenues, while another might not.

Some new tools should aid address these bug. One of the nigh noteworthy is Extensible Business Reporting Language (XBRL). A version of the Cyberspace standards engineering science Extensible Markup Linguistic communication (XML), XBRL allows each piece of information in a financial argument to be electronically tagged so that it can exist quickly and cheaply pulled into analytical software. These tags are independent in dictionaries, or "taxonomies," based on sets of standards such as the U.S. more often than not accustomed bookkeeping principles. XBRL-formatted financial statements are already available from companies such every bit EDGAR Online, but these early offerings take limitations. Taxonomies for specific industries must be adult; software for downloading and analyzing XBRL data is nonetheless at an early stage; and EDGAR Online'due south offering includes European companies just if their shares are listed on a U.Due south. exchange (although an XBRL taxonomy does exist for international fiscal reporting standards, used by all members of the European Matrimony and a number of other countries). Christopher Cox, the chairman of the Securities and Commutation Commission, is determined to address such limitations and accelerate the widespread adoption of XBRL. Toward that end, he announced in September 2006 that the SEC will invest $54 million in an interactive data system based on XBRL, which "will represent a quantum bound over existing disclosure technologies." (For more detail, meet the HBR List item "Here Comes XBRL," HBR February 2007.)

Another valuable new tool for managing reputational risk is visualization software, which uses colors, shapes, and diagrams to communicate the key points in financial and operating data. These displays are a big improvement over the spreadsheets at present widely used, which often make information technology difficult for even the virtually financially sophisticated executives to spot important anomalies and trends. Because information technology takes so much time to make sense of spreadsheets, executives tend to focus on the largest business units even though the greatest risks to reputation may reside in smaller ones—such as a struggling foreign subsidiary that has begun to utilise questionable means to run across upkeep targets. (Meet the exhibit "One Drug Company's Dashboard for Spotting Potential Risks" for an example of a unproblematic only effective apply of visualization software to highlight whether business concern units and products are on rails to meet year-cease goals.)

A Europe-based pharmaceutical company uses this dashboard to runway variances in functioning that can lead to risky behavior. (The names of divisions and brands accept been changed and the data have been scaled to protect proprietary data.) Although the revenues of the visitor'southward U.S. business are ahead of program, the Central Nervous System & Pain division is projecting that its revenues for the full twelvemonth volition fall curt, mainly considering of the Ibellance brand's projected performance. At this betoken, corporate executives should meet with the division's managers to ensure that none of the unit's planned actions to address the projected shortfall—such as special incentive programs for the sales force or prescribing physicians—would create unacceptable reputational risk for the company. And if Ibellance'southward functioning dramatically improves during the rest of the twelvemonth, they would be wise to investigate again.

Close gaps.

When a company'south character exceeds its reputation, the gap can be closed with a more constructive investor relations and corporate communications program that employs the principles of strategic media intelligence discussed above. If a reputation is unjustifiably positive, the visitor must either improve its capabilities, behavior, and performance or moderate stakeholders' perceptions. Of course, few companies would cull the latter if in that location were any way to reach the former. If, withal, the gap is large, the time required to close it is long, and the harm if stakeholders recognize the reality is likely to exist slap-up, so management should seriously consider lowering expectations—although this obviously needs to exist done in careful, measured ways.

Monitor changing behavior and expectations.

Agreement exactly how beliefs and expectations are evolving is not like shooting fish in a barrel, but there are ways to develop a picture over time. For instance, regular surveys of employees, customers, and other stakeholders tin reveal whether their priorities are irresolute. While most well-run companies behave such surveys, few take the additional stride of because whether the data suggest that a gap between reputation and reality is materializing or widening. Similarly, periodic surveys of experts in dissimilar fields tin can identify political, demographic, and social trends that could affect the reputation-reality gap. "Open response" questions tin be used to arm-twist new issues of importance—and thus new expectations—that other questions might miss. It is generally useful to supplement these surveys with focus groups and in-depth interviews to develop a deeper understanding of the causes and possible consequences of trends.

Influential NGOs that could make the visitor a target are one group of stakeholders that should exist monitored. These include environmental activists; groups concerned nigh wages, working weather condition, and labor practices; consumers' rights groups; globalization foes; and animals' rights groups. Many executives are skeptical nearly whether such organizations are genuinely interested in working collaboratively with companies to reach alter for the public good. But NGOs are a fact of life and must be engaged. Interviews with them can also be a good way of identifying issues that may non yet have appeared on the company'southward radar screen.

Finally, companies need to understand how the media shape the public'due south beliefs and expectations. Dramatic changes in the corporeality of coverage influence how fast and to what extent beliefs and expectations change. The big volume and prominent display of stories on the backdating of stock options in recent months is 1 case of how the media can help fix the calendar. The sharp drop in stories about insurance brokers' getting incentive payments from underwriters illustrates how the media can assistance relegate a hot topic to the back burner.

Put one person in charge.

Assessing reputation, evaluating reality, identifying and closing gaps, and monitoring changing beliefs and expectations will not happen automatically. The CEO has to give one person responsibility for making these things happen. Obvious candidates are the COO, the CFO, and the heads of take a chance management, strategic planning, and internal audit. They have the credibility and command some of the resources necessary to do the job. In general, those whose existing responsibilities pose potential conflicts probably shouldn't be chosen. People holding acme "spin" jobs, such every bit the heads of marketing and corporate communications, fall into this category. Then does the full general counsel, whose job of defending the company means his relationship with stakeholders is often adversarial and whose typical response to media inquiries is "no comment."

The called executive should periodically written report to top management and the lath on what the cardinal reputational risks are and how they are being managed. Information technology is up to the CEO or the board to decide whether the risks are acceptable and, if not, what actions should exist taken. In addition, meridian direction and the board should periodically review the gamble-management process and make suggestions for improving it.• • •

Managing reputational chance isn't an extraordinarily expensive undertaking that will require years to implement. At most well-managed companies, many of the elements are already in place in disparate parts of the organization. The additional costs of installing and using the new tools described above to identify risks and design responses are in the low to loftier six figures, depending on the size and complexity of the company. This is a minor expense compared with the value at stake for many companies.

A Framework for Managing Reputational Take a chance Understanding the factors that determine reputational risk enables a company to take actions to address them.

And then the primary challenge is focus: recognizing that reputational gamble is a distinct category of risk and giving ane person unambiguous responsibility for managing it. This person can then identify all the parts of the organization whose activities tin bear on or pose risks to its overall reputation and enhance the coordination amidst its functions and units. The improvements in decision making will undoubtedly consequence in a better-run company overall.

Senior executives tend to be optimists and cheerleaders. Their natural inclination is to believe the praise heaped on their companies and to discount the criticism. But looking at the world and one'due south system through rose-tinted glasses is an abdication of responsibility. Existence tough-minded about both will enable a company to build a potent reputation that it deserves.

A version of this article appeared in the February 2007 issue of Harvard Business Review.