A Tale of Two Corporate Crises – Why Reputation Matters

I was just looking at how much Goldman Sachs’ stock value fell after the recent SEC investigation was announced. Since April 16, the stock has fallen by 21 percent. The real challenge goes beyond this short-term loss of shareholder equity to how it will affect longer-term shareholder value and other outcomes. We’ve already seen how this issue helped seal the deal on sweeping new regulation of the industry, which could have a profound impact on how these companies operate.

We’ll also have to wait and see what the long-term impact of recent safety issues will have on Toyota. In focus groups I conducted just last night on another topic, there was a spirited discussion about which companies were among the most and least respected today. I was surprised to hear them mention Toyota (unaided) as one of the most respected and responsible companies. These consumers and opinion leaders argued that Toyota deserves the benefit of the doubt and that their confidence in the company has remained unshaken. My guess is that despite the fact that this is one of the greatest crises Toyota may ever face, the company will rebound quickly: consumers will start buying Toyota cars again, market share will return, and investor confidence will return to solid footing.

The difference between Goldman Sachs and Toyota is the reputation capital each of these companies have built. Toyota has built enormous reputation equity over the years by being one of the first automakers to aggressively address societal concerns on climate change and leading the industry on fuel efficient vehicles. In other words, they understood and responded to the expectations of the public and their stakeholders to be seen as a responsible company. On the other hand, Goldman Sachs remained largely silent and behind the scenes on emerging issues and controversies surrounding the financial services sector.

In my first post, I discussed our inaugural Return on Reputation (RoR) Indicator study that measures the real, tangible value reputation provides to companies. One of the most important outcomes of reputation that we measure is the ability to manage and weather crises. Building reputation equity is like depositing money in the bank. When a crisis hits (and they always do) you can draw down on the equity built without draining the account. Without the reputation capital, you lose the good will and the benefit of the doubt you need with customers, policy-makers, employees and investors.