Burgess COMMENTARY

Peter Burgess

“EXAMPLES ABOUND OF COMMUNITIES THAT HAVE SUCCESSFULLY MAINTAINED PUBLIC GOODS. NOBEL LAUREATE ELINOR OSTROM HAS DEVOTED HER CAREER TO EXPLAINING HOW PEOPLE SELF-ORGANISE TO PROTECT A VARIETY OF PUBLIC RESOURCES. IN A RECENT STUDY WE FOUND THAT, LIkEWISE, FIRMS CAN SELF-ORGANISE TO PROTECT THE REPUTATION THEY HOLD IN COMMON.”

As your parents might have warned you, choose your friends wisely because their behaviours reflect on you.

If you hang around with a pack of hooligans, hooligan or not you’ll be branded as such. Companies, too, are judged by the company they keep. entire industries have been punished for the sins of one or a few members. this creates some interesting management challenges. Companies cannot directly choose their industry associates – it would be a violation of antitrust laws to block a rival firm from conducting business. Yet each firm’s fate depends upon the behaviour of other firms in its industry. How do firms strategically manage this interdependence?

THE REPUTATION COMMONS PROBLEM

A memorable experience with one firm can influence how you feel about and relate to a broad swathe of firms. A delayed or cancelled flight can put you off future airline travel and push you into greater reliance on rail, coach, or car travel. Buying a “lemon” once may cause a permanent aversion to used car purchases. these types of situations, in which one firm’s actions can degrade the prospects of other firms in the same market, we term reputation commons problems.

in effect, firms across an industry share a commons constituted of their collective standing in the eyes of observers – their shared reputation. As with the physical commons problems, such as over-exploitation of public lands and waters, the actions of a few can damage the good held in common by the many.

Studies have demonstrated the existence of these sorts of problems across a range of industries. A drug recall by one pharmaceutical firm precipitated a one per cent drop in the market value of a portfolio of 50 rival firm stocks. Following the tylenol tampering incident in the US in 1982, the owners of tylenol, Johnson & Johnson, lost US$2.11 billion in market value, but the over-the-counter pharmaceutical industry lost about US$4.06 billion. Airplane crashes, petrochemical spills, car recalls, earnings restatements, near nuclear meltdowns, and so forth – often the fault of a single firm – have damaging consequences for entire industries.

We theorise that reputation commons problems arise due to inadequate information provision. Observers lack the information, or at least desire, to determine if the problem is unique to the offending firm or endemic to all firms of the same type. they then respond in ways that affect entire industries. For example, after the near meltdown of one reactor at one facility of one nuclear power company at three Mile island in 1979, all nuclear power plants in the US, regardless of their safety procedures, were subjected to much stricter regulation and have been unable to build new facilities ever since.

Regulators are not the only ones who use a broad brush to tar entire industries for the sins of a few. the labour force shied away from the chemical industry in the aftermath of the disastrous poison gas leak of Union Carbide in Bhopal, india, in 1984. Surely banking has lost some of its lustre as a career option more recently. Consumers, suppliers, and partners may hesitate to do business with entire industries stigmatised by the bad acts of a few.

TEAMING UP TO BUILD MENTAL FENCES

Long-held theories of commons problems offer little hope of resolution. they surmise that the pursuit of self-interest necessarily leads to “the tragedy of the commons” for public goods. People have a dominant incentive to harvest as many fish as possible from the common lake; draw as much water as desired from the common well; raise as much livestock as possible on the local grazing land. Unless public goods are privatised – access rights to the lake or the well sold, parcels of grazing land sold and fenced off – then these resources will be depleted.

Despite this logic, examples abound of communities that have successfully maintained public goods. nobel Laureate elinor Ostrom has devoted her career to explaining how people self-organise to protect a variety of public resources. in a recently published study, we found that, likewise, firms can successfully self-organise to protect the reputation they hold in common. the US-based chemical industry,

Over the period 1980 to 2000, provides a natural experiment for reputation commons problems and their resolution. We measured the degree to which an industrial accident attributed to any single chemical firm led to stock price declines in other chemical firms. From 1980 to 1984, there were measurable but minor spill over effects. At the end of 1984, the Bhopal disaster occurred. thereafter, these spill overs became significantly more severe.

The industry recognised their common problem and worked together to create a voluntary self-regulatory programme called responsible Care. After the programme’s full implementation in 1990, these spill over effects returned to the relatively minor levels present before the Bhopal disaster.

How did this self-regulatory programme resolve the reputation commons problem?

We hypothesise that the key to its effectiveness was information provision. to overcome the “chemophobia” that set in after the Bhopal disaster, chemical plants opened their doors and showed locals, regulators, emergency officials, and the media how things worked. thereafter, observers began to treat chemical plants individually rather than as a homogenous mass. in effect, this information provision built “mental fences” in the minds of observers that parcelled the industry’s reputation into firm-level plots. Moreover, these mental fences kept the problems of each firm from spilling out across the industry.

Firms still could not hide from their own problems – we found that they suffered a similar level of stock price decline in response to their own accidents before and after responsible Care. But they were collectively better off because they were less exposed to the missteps of their rivals. they came together to stand apart, enabling them to be judged more by their own actions and less by the company they keep.

One such project is exploring the lengths that international companies will go to in order to protect their reputations. the study, entitled “Made in China: Corporate Strategies for Protecting reputation”, looks at the information strategies that firms use to influence public perception and at policy responses to concerns over Chinese products. Dana Brown, Lecturer in international Business, explores how firms lobby on the image of Chinese products and labour conditions, and the variety of information strategies that are employed.

Understanding the role of business journalists in creating and influencing corporate reputation is the focus of research undertaken by Jonathan Silberstein-Loeb, a research Fellow with the Centre. “Business Journalism and Corporate reputation in europe” is a comparative study of business journalism throughout europe and investigates the corporate belief that business journalism affects their reputation. the research will examine the extent to which business journalism and corporate reputation are market mechanisms that serve quasi self-regulatory functions

Using the 2012 Olympic Games as an example of a major programme, a further research project is evaluating key questions on the intersections between the three areas of corporate (stakeholder) reputation, major programme management and programme failure. the research project, “the impact of Major Programme Failure on Corporate reputation” investigates the extent to which public bodies and corporations anticipate the likely onset of programme setbacks and failures and the damage limitation methods employed. Dr Janet Smart and Dr Kasim randerjee of the Bt Centre for Major Programme Management at the Saïd Business School will also question how the clients and customers of a corporate body involved in a failing programme take action to protect themselves from reputational damage.

The Oxford University Centre for Corporate Reputation, based at the Saïd Business School, was established in January 2008 under the Directorship of Rupert Younger.

www.sbs.oxford.edu/reputation