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Cyberbreach and Reputation Woes Hack Away at Bottom Line for 44% of Financial Firms

According to the 2015 Makovsky Wall Street Reputation Study, released Thursday, 42% of U.S. consumers believe that failure to protect personal and financial information is the biggest threat to the reputation of the financial firms they use. What’s more, three-quarters of respondents said that the unauthorized access of their personal and financial information would likely lead them to take their business elsewhere. In fact, security of personal and financial information is much more important to customers compared to a financial services firm’s ethical responsibility to customers and the community (23%).

Executives from financial services firms seem to know this already: 83% agree that the ability to combat cyber threats and protect personal data will be one of the biggest issues in building reputation in the next year.

The study found that this trend is already having a very real impact: 44% of financial services companies report losing 20% or more of their business in the past year due to reputation and customer satisfaction issues. When asked to rank the issues that negatively affected their company’s reputation over the last 12 months, the top three “strongly agree” responses in 2015 from communications, marketing and investor relations executives at financial services firms were:

  • Financial performance (47%), up from 27% in 2014
  • Corporate governance (45%), up from 24% in 2014
  • Data breaches (42%), up from 24% in 2014

Earning consumer trust will take some extraordinary effort, as a seemingly constant stream of breaches in the news and personal experiences have clearly made customers more skeptical of data security across a range of industries. When asked which institution they trust more with their personal information and safeguarding privacy, today’s consumers ranked traditional financial institutions—including insurers—higher by a wide margin over new online providers, but a larger percentage of consumers do not trust any organization to be able to protect their data:

  • Bank/brokerage, insurance, or credit card company (33%)
  • U.S. Government (IRS, Social Security) or U.S. Postal Service (13%)
  • Current healthcare company (4%)
  • Online wallets (PayPal, Google Wallet, Apple Pay) (4%)
  • Retail chain or small businesses (4%)
  • All other (3%)
  • None of these organizations or companies can be trusted (39%)

 

CVS Announces Plan to Stop Selling Cigarettes

CVS to Stop Selling Cigarettes

On Feb. 5, CVS Caremark Chief Executive Larry Merlo said, “We’ve come to the decision that cigarettes have no place in an environment where healthcare is being delivered.” The company, he announced, will remove all cigarette and tobacco products from its 7,600 pharmacies nationwide by Oct. 1. The move is expensive, with up to $2 billion in projected lost sales. But CVS is betting on the long-run gains from doubling down on brand reputation and helping customers to live—and shop—far longer.

President Barack Obama personally took the time out to praise CVS, saying in a statement that the move will help wider efforts to “reduce tobacco-related deaths, cancer, and heart disease, as well as bring down healthcare costs.”

“CVS is now one of a small group of companies that have realized that their reputation is the most valuable asset they have and that building a stronger reputation by avoiding risks to that reputation can create a significant competitive advantage,” said Paul Argenti, professor of corporate communications at Dartmouth’s Tuck School of Business, in a column for the Harvard Business Review. “From the White House to the American Lung Association, CVS has received kudos for what seems to be a focus on shared value with society rather than the reckless pursuit of revenue at any cost.”

While CVS stock initially dropped the day of the announcement, shares have since risen 2.3%, success further bolstered when the country’s largest drugstore chain reported 2013 revenue of $126.8 billion—up 3% on healthy growth for drug plans and in-store pharmacies offset by weak growth in front-of-store sales.

“Its profit comes increasingly from health plans, which aren’t keen on carcinogens,” Jack Hough wrote in Barron’s. “Consider: CVS’ tobacco decision is expected to subtract six to nine cents from its yearly earnings per share. But a prescription deal with the Federal Employee Health Program, which expires at year’s end, is worth 16 cents to 21 cents a share, estimates investment bank Mizuho Securities. For CVS, a good chance at renewal just became better, and there’s plenty more business to be won.”

In Forbes’ CMO Shift blog, brand consultant Scott Davis wrote:

The $2 billion decision to boldly dump tobacco sends CVS’ boldest signal of commitment to the brand and to where it sees its future growth; it’s an unprecedented move and one that is wickedly smart. CVS is putting its money where its brand is, betting that this first mover advantage will pay off. I say “first mover” because no one truly owns health and wellness. Sixteen thousand health and wellness apps were downloaded last year. Over $1.4 billion was spent by people trying to learn more about the topic. The overall category is heading to $1 trillion in the next 3-5 years and the timing is right for someone to step in and lead the dialog and become the Amazon of health and wellness. Why not CVS?

Indeed, CVS has spent considerable time and money extending the legacy of pharmacists as community health experts by adding over 800 MinuteClinic walk-in facilities. In doing so, the company has become the largest U.S. pharmacy healthcare provider.

The chain’s competitors are also branching into anti-smoking efforts as they expand their role in the wellness market. Walgreens recently unveiled a partnership with GlaxoSmithKline Consumer Healthcare to launch a free, Internet-based smoking cessation program called Sponsorship to Quit.

Overall U.S. cigarette sales fell 31.3% from 2003 to 2013, according to Euromonitor International. Many health officials hope that the move will help continue to decrease the number of smokers and smoking-related deaths in the U.S. “I think CVS recognized that it was just paradoxical to be both a seller of deadly products and a healthcare provider,” U.S. Centers for Disease Control and Prevention Director Thomas Frieden told Reuters.

Working to build and maintain a strong reputation also boosts the bottom line. Studies from Argenti and a range of other researchers suggest that companies with a strong reputation enjoy price advantages, being able to negotiate lower prices with suppliers and higher charges to customers. They can also recruit better employees, have more stable revenues and, “when something bad happens, they are given the benefit of the doubt by their stakeholders.” Further, “highly reputed companies are more stable, which means they have higher market valuation and stock price over the long term and greater loyalty of their investors, which leads to less volatility,” according to Argenti.

Convenience stores account for 75% of cigarette sales nationwide, so the tobacco industry has yet to express concern about prospective losses from drugstore sales. But Dr. Richard Wender of the American Cancer Society said CVS’s move would have an effect. “Every time we make it more difficult to purchase a pack of cigarettes, someone quits,” he told Reuters. So far, CVS is betting on that for patients’ health, and its own.

America’s Most Reputable Companies

As a business asset, reputation is often overlooked in favor of the more easily quantified components of a typical balance sheet. But reputation may be the most important factor in determining whether or not a consumer chooses a particular product or service. And although it may be difficult to put a number on reputation, it’s not impossible, as the latest survey by the Reputation Institute indicates.

As reported in Forbes, according to the survey of more than 30,000 consumers, Amazon.com is the most reputable large companies in the United States.

“Amazon is the most reputable company in the U.S. in 2011 because consumers believe that it stands for more than what it sells,” says Anthony Johndrow, managing partner at Reputation Institute. “Its enterprise-wide story engages consumers in more than just delivering innovative products and services, a trustworthy and ethical customer experience or strong financial performance. The whole really is greater than the sum of the parts with Amazon, and this holistic perception creates a meaningful connection between Amazon and consumers, resulting in an excellent reputation score.”

The Reputation Institute gauged reputation by measuring how people felt about 150 of the largest U.S. companies in the areas of trust, esteem, admiration and good feeling. From there they were able to create a “RepTrakPulse” score that went from 0 (the worst) to 100 (the best). Amazon’s 82.7 score was 1.3 points higher than the second place company Kraft Foods. The next four companies  on the list–Johnson & Johnson, 3M, Kellogg’s and UPS–were the only other companies to score in the 80s.

On the other end of the spectrum, unsurprisingly, financial firms received some of the lowest scores. Freddie Mac’s 29.47 score put it at the bottom of the list with AIG, Fannie Mae, Goldman Sachs and Halliburton rounding out the bottom five. The highest charting insurer was State Farm, which was 48 on the list with a score of 72.7.

The following are the top 10 most reputable U.S. companies (the entire list can be found at the end of the Forbes article):

[TABLE=9]

Does Saying “I Was Wrong” Help Repair the Brand?

For several years now, reputation risk has been among the top threats listed by company executives when they are asked what keeps them up at night. There are several reasons for this. The emergence of 24-hour news, the internet and social media have created a world where corporate snafus that would have been merely a one-day story in the paper into an ongoing PR nightmare. Similarly, advocacy groups are now much more evolved and can launch coordinated campaigns to encourage public outrage. But most of all, most companies simply have no idea how to repair their image after it’s tarnished.

There is no insurance that can fix the problem and even where coverage is available to fund a “PR swat team” to come to the rescue, the short-term damage is already done, and the brand will always be tied to the negative press. In the long term, the reputation smear may prove survivable, but it sure never seems that way in the initial hours, days, weeks and sometimes even months and years following the calamity.

In recent years, the most oft-repeated mantra for avoiding irreparable harm to the brand is to “get out in front of the story.” Basically, after a mishap occurs, be honest, transparent and don’t let your CEO wake up to be blind-sided with an unwanted Wall Street Journal headline. Tell the public that something went wrong and that you’re now doing everything in your power to fix the situation.

That certainly makes sense, and recent examples of companies who were criticized for their delayed response include Toyota, Massey Energy and BP. The fact that all three companies seemed to bury their heads in the sand — for years — when it came to safety issues still would have come out, but the instant backlash perhaps could have been different if the companies took charge of the situation sooner — at least with Toyota anyway.

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I’m not sure there is anything BP could have done differently in the first week or two that would have made people feel much differently about the oil giant than they do today.

But, in trying to be honest and transparent, should the company’s executives go so far as to say “I was wrong” and “I’m sorry”?

Logic says yes.

As journalist and author Kathryn Shultz pointed out today in a guest post on the New York Times‘ Freakonomics blog, however, those who have admitted the error of their ways have not always been greeted with forgiveness.

Quite the opposite, in fact.

Earlier this year, former Assistant Education Secretary Diane Ravitch published The Death and Life of the Great American School System, which denounced a series of school reforms (including educational testing, school choice, charter schools, and No Child Left Behind) that she herself had advocated for years.  When I interviewed Ravitch for Slate, the comments section lit up with the familiar charges: “Why is Diane Ravitch Making a Bundle Saying She Was Wrong All Along?” “Wow! Thanks Diane! It’s only taken you ten years to see the blindingly obvious.” “We’re supposed to be impressed by her contrition?”

And that is the central question: what are we supposed to do about the sincere contrition of those who err?

Schultz, who just wrote a whole book on the topic that looks interesting but I have yet to read called Being Wrong, says that the answer is a lot easier in our personal lives than it is in the public sphere. In our private lives — with relatives, friends or colleagues — the answer is usually forgiveness. People make mistakes and, often, when they are willing to admit and own up to their errors, they should be granted at least some level of reprieve.

But that courtesy is rarely extended to public officials (which is who she is really speaking about here) or corporate representatives (which is who I believe this concept may also apply to)/

When our public officials make mistakes, the costs (which are often not borne directly by them) can be horrifying.

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It seems reasonable to demand not just an acknowledgment of error but some effort at ameliorating the consequences.
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Sometimes, though, this is simply impossible.  No one can bring back the war dead; no one can unspill the oil; no one can compensate a child for twelve years of bad schooling. All that truly contrite leaders can do in such a situation is work off their public debt the best way they know how – and live with the torments of their own conscience.
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But are those torments real?  Many people doubt it, and therefore find the idea of forgiveness galling.  As one commenter observed after listening to a conversation about wrongness over at The Takeaway, “A lot of people’s admitting to being wrong is little more than a PR ploy.  Public apologies do not impress me.

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”  In the acid bath of cynicism that is contemporary American politics, it is all but impossible for public figures to convincingly establish their sincerity.  And fair enough: sometimes, political changes of mind really are craven or self-interested or simply for show.  But sometimes, presumably, they are not.

When our public officials make mistakes, the costs (which are often not borne directly by them) can be horrifying. It seems reasonable to demand not just an acknowledgment of error but some effort at ameliorating the consequences.  Sometimes, though, this is simply impossible.  No one can bring back the war dead; no one can unspill the oil; no one can compensate a child for twelve years of bad schooling. All that truly contrite leaders can do in such a situation is work off their public debt the best way they know how – and live with the torments of their own conscience.

But are those torments real?  Many people doubt it, and therefore find the idea of forgiveness galling.  As one commenter observed after listening to a conversation about wrongness over at The Takeaway, “A lot of people’s admitting to being wrong is little more than a PR ploy.  Public apologies do not impress me.”  In the acid bath of cynicism that is contemporary American politics, it is all but impossible for public figures to convincingly establish their sincerity.  And fair enough: sometimes, political changes of mind really are craven or self-interested or simply for show.  But sometimes, presumably, they are not.

Ultimately, her short post doesn’t offer any concrete solutions. It certainly does present a good amount of evidence that, publicly, forgiveness — especially when the act leads to death or major destruction — is tough to come by. Former Secretary of Defense Robert McNamara is cited as a prime example.

Regardless, I have to believe that, in this day and age, corporate honesty and admission of guilt will better resonate with the public than anything else. But the alternative perspectives raised here sure do lead us to one indisputable conclusion: executives are right to be concerned with reputation risk.