Warren Buffett once said that it takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
One family that definitely did not take this adage to heart is the Guptas.
To protect your small business from anything like “Guptagate“, it is vital for entrepreneurs and business leaders to understand the extreme consequences of reputational damage. Once a reputation is lost, it is almost impossible to recoup – it may even be seen as your company’s most valuable asset.
Since the Guptas were pilloried in the press for unsavory business practices linked to government and corrupt ties to the president, they were forced to resign all their directorships and left the country. These allegations have forever destroyed the Gupta’s reputation and their ability do business untainted.
“Reputational risk is regarded as the greatest threat to a company’s market value”
The good and the bad news
According to the Harvard Business Review, it’s crucial to understand the importance of your company’s reputation. Firms with strong, positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium.
Their customers are more loyal and buy broader ranges of products and services. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earnings multiples and market values and lower costs of capital.
In fact, reputational risk is regarded as the greatest threat to a company’s market value according to a study by PricewaterhouseCoopers and the Economist Intelligence Unit. Moreover, in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital and goodwill, organisations are especially vulnerable to anything that may damage their reputations.
Reputational damage can have far reaching consequences including lost revenue and clients, service providers leaving you high and dry, increased operating, capital or regulatory costs and eroding or destruction of shareholder value. Extreme cases can even lead to bankruptcy.
With this in mind, it is clear that identifying ways to prevent reputational damage is crucial. Rather prevent it happening than having to deal with the fallout.
Companies of all sizes are urged to consider the following to avoid reputational damage:
- Preserve a strong reputation by effectively communicating and building solid relationships.
- Maintain timely and efficient communications among shareholders, customers, boards of directors, and employees.
- Set a tone of strong corporate governance from the top down.
- Establish strong enterprise risk management policies and procedures throughout the organisation, including an effective anti-fraud program and create awareness at all staff levels.
- Instill ethics throughout the organisation by enforcing a code of conduct for the board, management, and staff.
- Develop a comprehensive system of internal controls and practices (including those related to computer systems and transactional websites).
- Comply with current laws and regulations and enforcing existing policies and procedures.
- Implement independent testing and transactional testing on a regular basis.
- Establish a crisis management team in the instance of a significant action or event that may trigger a negative impact on the organisation.
Once a negative opinion is formed about a company, it can be difficult to change, so it’s essential to try and run your business in a way to avoid any damage to your good name— which can make or break a company.
About the author: Kay Vittee is the CEO of Quest Staffing Solutions (Pty) Ltd one of South Africa’s leading staffing solutions provider. She’s a business woman holding a Masters in Business Administration, a B.Com (Banking and Economics) and various other financial and marketing qualifications. Kay’s business acumen and success have made her a sought after speaker and thought leader.