Brand reputation is an intangible asset for organisations. Similar to other attributes like top talent or intellectual property, quantifying its significance is challenging for companies. However, when it all goes wrong there’s nothing abstract about it: balance sheets feel the pinch and financial consequences of a reputational event can last for years.
Reputational events are incidents that can significantly harm a company’s image and standing such as data breaches, product failures, environmental accidents, unethical behaviour or other scandals. In our social media era, a misplaced comment from an official account or an insensitive campaign can quickly develop into a serious situation with offline consequences.
One such example happened to luxury fashion brand Dolce & Gabbana (D&G), who suffered from declining sales for several seasons after a series of controversies and substantial backlash on social media in 2018. The crisis alienated one of its main markets in particular, China, which threatened the financial standing of the brand as a whole. The cancellation of their 2018 Shanghai fashion show alone resulted in a loss of €20 million, and sales fell by 15% at a time where the luxury market in China was expanding and opportunities abounded for competitors to seize. It could have been a brand-ending moment, and it has demanded consistent, significant efforts to rebuild D&G’s brand image in China.
Financial costs resulting from such situations can be direct, including legal fees, settlements, fines, product recalls, and environmental damage restoration, among others. But they can also be indirect, such as in the D&G example: loss of revenue, cancellations, alterations in expansion plans, stock price impacts, and the loss of investors and financial opportunities. In the long-term, customer loyalty, diminished brand value and consumer trust can have lingering effects.
This can be seen clearly in another modern scandal: the Volkswagen emission dieselgate. In 2015, researchers discovered that VW had used a software in their diesel engines that altered its performance in order to meet regulatory emission standards, when it recognised it was being run in a test environment. However, once the car hit the road the emissions of pollutant nitrogen oxide (NOx) were up to 40 times higher than the legal limit.
Millions of cars worldwide were affected, and by 2020 it had cost the company over €30 billion in settlements, buybacks, lease terminations, compensation for affected customers and pollution mitigation. In the wake of the scandal, VW posted its first quarterly loss in 15 years (£2.5billion in October 2015) and has included provisions to deal with it in every results report ever since.
While the best thing to avoid scandal would be not doing anything to apologise for, the second best option is effective crisis management. A well-defined crisis management plan, designed when things are peaceful, is essential to avoid escalating reputational events, and yet a surprising number of companies do not invest time and thought into this process unless a crisis is imminent.
On the other hand, many firms will plan their operational response, but not consider the communications aspect. A crisis response must determine clear communication lines (preferably involving a reduced group of decision makers), designated spokespeople and protocols for addressing various types of incidents. In addition, training key employees to handle crises and conducting regular simulation scenarios can prepare organisations to respond swiftly and effectively, without making the situation worse. Companies that plan ahead are able to recover more quickly from setbacks.