The management of reputation risk and airline sustainability
1FLOURIS, KUCUK YILMAZ THE MANAGEMENT OF REPUTATION RISK AND AIRLINE SUSTAINABILITY Triant FLOURIS, Ph.D. Dean, School of Aviation Sciences, Professor, Aviation Management, Daniel Webster College, Nashua, NH 03063-1300, USA Email: firstname.lastname@example.org Ayse KUCUK YILMAZ, Ph.D.* (Author for Correspondence) Assistant Professor, Department of Civil Aviation Management, School of Civil Aviation, Anadolu University, 26470 Eskisehir, Turkey +90222 3350580-6962 Email: email@example.comAbstract:Corporate reputation is one of the most critical management topics in strategic airlinemanagement as reputation has a direct link to sales. Corporate reputation is impacted bycompany value drivers. Furthermore, reputation drivers can create value to a company. Also,every crisis is unique and every company is different. For these reasons, crisis andspecifications of the company should be considered by management to be linked to aneffective reputation risk strategy. The management of a company’s reputation should be takeninto consideration very seriously by air transportation (airline and airport) managers. Thispaper’s main research question is: “how fundamental is the integration of the management ofreputation risk with the enterprise risk management (ERM) function of an airline?” The articleargues that the integration of the management of reputation risk with enterprise riskmanagement (ERM) functions in the airline can help airlines, just like other industryparticipants, achieve high triple bottom line concept based performance (financial, social andenvironmental) and develop a clear understanding of the industry’s competitive dynamics.Leading global airlines are concerned across economic, social, and environmental parametersin their quest for sustainability. Implementing a triple bottom line concept in the managementof an airline supports a company’s reputation. We assume that environmentally friendlymanagement (based on the holistic management concept focusing on the economicenvironment, social environment, and the natural world environment) and sustainability basedefforts help accomplish the ultimate goal of airline business sustainability. This study aims tomake a contribution to the literature on the management of reputation risks to airlinesustainability by providing an enterprise risk management based perspective and a newsystematic approach.Key Words: Airline, business and management, enterprise risk management, management,reputation, risk, sustainability.JEL Classification Codes: M100, M140, M190
2FLOURIS, KUCUK YILMAZ 1. IntroductionCrises can strike any company at any time. Microsoft, ValueJet, Chrysler, Pepsi and thetobacco industry are some of the most recent companies that can attest to this fact, but theyare not the only ones. Crises do not discriminate based on a company’s size or reputation, andthey can hit when a company least expects them. They come in many forms - strikes, layoffs,product recalls or allegations of misconduct, but while some of these may seem small, everycrisis has the potential to damage the reputation of a company (Soopertutorials, 2009).Schreibe (2008) suggest that there are two definitions of reputation, one from the perspectiveof the company and the other from the perspective of stakeholders: i. From the perspective of the organization, reputation is an intangible asset that allows the company to better manage the expectations and needs of its various stakeholders, creating differentiation and barriers vis-à-vis its competitors. ii. From the perspective of stakeholders, reputation is the intellectual, emotional and behavioral response as to whether or not the communications and actions of an organization resonate with their needs and interests.Reputation is an intangible and vulnerable asset to any company. The management ofreputation is crucial to create and maintain value advantage. Company reputation is a criticalrisk since it can be destroyed very rapidly. Both realities and perceptions can impact corporatereputation. Reputation risk is often not incorporated into risk management practices in aholistic fashion. Airlines in today’s globally warmed business environment should possesseffective ways in making reputation risk management part of their overall risk management.According to Bayer "Although reputation is the quintessential intangible asset, a strongcorporate reputation yields concrete benefits - higher market value, stronger sales, and anincreased ability to hire the best and the brightest” (The Conference Board, 2009). Corporatesurveys illustrate that the management of reputation risk has recently started to be integratedwith their enterprise risk management (ERM) function or another risk oversight program byexecutive managers in companies of diverse sectors.
3FLOURIS, KUCUK YILMAZWe propose a new management process in regard to this concept. In our process, managingreputation risk utilizing a fresh enterprise risk management perspective aims to make acontribution in the following key issues and related literature: • Understanding of the strategic value of corporate reputation to the airline. • Integrate reputation risk management with ERM or other risk management programs. • Identify and prioritize the main causes of reputation risk. • Quantify the reputation risk together with all corporate risks. • Treat risks holistically. • Understand risk interrelationships within the business. • Develop an understanding of and build relationships with key stakeholders and take social networking and new media seriously.This paper is organized into five main parts. The reputation risk management concept in theglobal business management is presented in next part. The discussion of Reputation Risk inAirline Business and Management takes place in part three. The developed conceptual processto reputation risk management is presented in this part. Concluding remarks comprise the lastpart of the paper. 2. Reputation Risk Management in Business and ManagementReputation is a key element for a successful business. Reputation is defined as the public’sperception of the corporation. There are many things that can damage a corporation’sreputation from true events to fictitious, or even malicious, gossip. In recent years, additionalresearch has been conducted in an attempt to understand what corporations can do to bettermanage their reputation risk (Tonello, 2007).Reputation risk management is one of the leading issues in contemporary business andmanagement field. The management of reputation risk is normally handled by managing theprimary risks. However, as soon as such a risk manifests itself, companies should have a
4FLOURIS, KUCUK YILMAZdamage control plan. It is all about the communication to stakeholders and givingtransparency regarding the risk event. The better the market is informed about the risk and thetaken actions the less reputational damage is to be feared. However, many managers hope toget the curve in time, but crash against the reputation risk wall, since the public deems itselfnot completely informed. The trust relationship with the stakeholders is then damaged (GerritJan van den Brink, 2009).In leading organizations, risk management is viewed not as a process, but rather as a“management competency”- a discipline that adds rigor and enables the enhancedmanagement of uncertainty and volatility, effectively minimizes threats and capitalizes onopportunities. Companies at the height of performance in their respective industries haveembedded this competency into their business practices to effectively manage risk across thecontinuum- moving beyond a traditional focus on controls and compliance, to create acompetitive advantage (Ernst & Young, 2009).According to Rayner (2009) the key components of reputation risk management are: Clear and well-communicated business vision, values, and strategy that set the rightethical and stakeholder-aware tone for the business. Supporting policies and codes of conduct that guide employee behavior and decision-making so that goals are achieved in accordance with business values. Extension of the business’s values and relevant policies to key partners in the supplychain. Dialogue and engagement to track the changing perceptions, requirements, andexpectations of major stakeholders continuously. An effective enterprise-wide risk management system that identifies, assesses,responds to, monitors, and reports on threats and opportunities to reputation. A culture in which employees are risk-aware, are encouraged to be vigilant, raiseconcerns, highlight opportunities, and act as reputational ambassadors for the business. Transparent communications that meet stakeholder needs and build trust andconfidence.
5FLOURIS, KUCUK YILMAZ Robust and well-rehearsed crisis management arrangements.In the current business climate, it is imperative for companies to form a strategic view of therisks that they are facing and develop their thinking about the necessary actions requiredshould the event they fear actually happens. Risk management needs to be taken back fromthe compliance function into the boardroom. Companies need to enhance their capability toproactively identify these risks with a rigorous and disciplined approach. Management needsto be alert and nimble, prepared to define their risk appetite and tolerance, and monitor it. Itshould be cautious and focused. And it must be ready to take action. Based on this necessity,the top 10 risks for global business is presented by Ernst and Young Research (2009) asfollows in Figure 1. This figure is entitled as “Risk Radar” by Ernst and Young. It is useful inpreparing a risk map of companies according to their situations, environment and objectives.Figure 1. The top 10 risks for global business (Ernst & Young, 2009).Factors influencing reputation risk (Gerrit Jan van den Brink, 2009) can be listed as follows:
6FLOURIS, KUCUK YILMAZThe attitude of stakeholders towards companies changed over time. Nowadays companies aremore seen as “corporate citizens” which behavior is checked for conformity. A famousexample was the public reaction on the disposal of the Brent Spar by Shell. The public startedboycotting Shell by purchasing fuel by other companies. Some groups even demolished somefuel statements. The problem did not stay in just one territorial area, but swapped over toother countries as well. Since the media are organized globally and internet is also emerged asa separate distribution channel, it only takes minutes to publish reputation damaginginformation around the globe. Globalization in such cases is to be seen as a risk factor. Socialstakeholders also organized themselves in order to give the voices more impact. Attac is awell known organization with clear ideas regarding cultural values. However, some violentgroups attach themselves to demonstrations causing problems. Trust in politicians and inboard members is reducing and therefore some issues may be discussed in sharper words thanbefore. Companies sometimes have problems regarding the top manager’s salaries, which areseen as far too high. In Germany especially the pay-offs after the takeover of D2 by Vodafonewas prosecuted. People are currently more and more using the internet in forums, films(YouTube), etc. These films are easily distributed and may contain content, which can bedamaging for the company’s reputation. However, it is almost impossible to screen theinternet for such material.Risks are categorized into four main sections for the purposes of this research. Compliancethreats originate in politics, law, regulation or corporate governance. Financial threats stemfrom volatility in market and the real economy. Strategic threats are related to customers,competitors and investors. Operational threats impact the processes, system, people andoverall value chain of a business (Ernst & Young, 2009). Also, every risks are marked withsymbols as up from 2008, up down 2008 and new entry. Risks are changes in time. Top risksfor companies change continuously. Some risk change their shape, some risks are combinedwith other.Reputation is number 10 on Ernst & Young’s “Risk Radar.” Not only the reputation of firmsbut those of entire industries are increasingly under threat. Environmental and climateconcerns threaten oil and gas and utilities companies; pressures to provide wider access tolife-saving drugs threaten funding for innovation in life sciences; and the credit crunch isweakening public trust in banking and asset management companies. Reputation risks, ranked22nd in the 2008 report, rose dramatically on the global list primarily as a result of the
7FLOURIS, KUCUK YILMAZfinancial crisis. This crisis elevated a firm’s financial reputation to a matter of survival inmany cases, and threatened the reputation of entire sectors such as asset management andbanking. In addition, the ongoing trend of escalating compliance requirements continued todrive the importance of this risk, because compliance failures are perhaps the most commonsource of serious reputational damage (Ernst & Young, 2009).Reputation is a key element for a successful business. Reputation is defined as the public’sperception of the corporation. There are many things that can damage a corporation’sreputation from true events to fictitious, or even malicious, gossip. In recent years, additionalresearch has been conducted in an attempt to understand what corporations can do to bettermanage their reputation risk. Benefits of a positive public image include (Tonello, 2007): Public perception of reputation can positively affect profitability, market-to-book value, and total sales A higher reputation is linked with an average annual stock price increase 35 percent of investment decisions are made based on reputation and image A premium is paid for strong reputation capital in the mergers and acquisitions marketIn many sectors, such as oil and gas, the nature of reputation risks has changed little since2008, but the intensity of ongoing public debate has increased. The most dramatic reputationrisk development in 2009 was the financial crisis and resulting credit crunch. With greatuncertainty regarding the nature, extent and disclosure of losses, and the business strategiesand management oversight associated with these losses, a good financial reputation became amatter of survival. Credibility, built on financial strength, transparency and honestcommunication with the market, was a critical component of value. Reputation has alwayshad a link to market capitalization, but the credit crunch made this link obvious, “Reputationrelates to confidence. When damaged it can spiral out of control,” wrote one commentator.Allegations of fraud, insider trading and other ethical lapses that have been associated withthe crises further eroded the tattered reputations of many institutions (Ernst & Young, 2009).
8FLOURIS, KUCUK YILMAZReputation risk management to corporate sustainability becomes ever more important forcompanies in the context of today’s volatile markets given presures for more intensecompetition. Otherwise, companys faces risk losing the trust of stakeholders.Reputation has become increasingly important to businesses as the world becomes morecomplex. It is important because the intangible factors of business (talent, brand strength,patents, knowledge, technology, leadership, etc.) are rapidly replacing the tangible factors(real estate, machinery, inventory, etc.). As such, understanding what drives an industry’sreputation is important for companies and especially senior management to ensure the longterm viability of their organization (World Economic Forum, 2009). It is not always the casethat a crisis proves damaging to an organization’s reputation, and businesses have emergedfrom unexpected incidents with their reputations intact and sometimes even enhanced.Nonetheless, corporate reputations are fragile, and careful management, combined withdecisive leadership, are required to minimize the damage that may impact on shareholder andstakeholder confidence (INCE&CO, 2009). 3. Reputation Risk in Airline Business and ManagementContemporary business and management models to corporate sustainability are highlyconsidered by airline managers in today’s business environment. Corporate reputation is afundamental element of sustainable and efficient contemporary business management.The aviation business sector has a complex and fragmented structure as it includes multipleplayers as different sizes. The complex industrial structure of aviation coupled with itsdependence on the economic and social structures of recipient nations and its vulnerability toglobal economic, social, environmental and health shock factors, increases the reputationmanagement pressure of the sector (World Economic Forum, 2009).Specifically, the airline industry is highly competitive. Airline profits are sensitive to evenslight changes in fuel costs, average fare levels, and passenger demand. Passenger demandand fare levels historically have been influenced by, among other things, the general state of
9FLOURIS, KUCUK YILMAZthe economy, international events, industry capacity, seasonality, and pricing actions taken byother airlines. The principal competitive factors in the airline industry are fares, customerservice, routes served, flight schedules, types of aircraft, safety record and reputation, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs.(JetBlue, 2008)To best manage reputation, this risk should be embedded on enterprise risk managementprocess in a holistic fashion. To achieve the following objectives, airlines should beimplementing enterprise risk management models: - Network optimization - Cost Control and Productivity - Revenue Maximization - Improved relationship with stakeholders via identifying and prioritizing of stakeholders - Risk optimization - Seizing opportunities.Risks to reputation should be integrated into the business enterprise risk management (ERM)framework so that they receive attention at the right level and appropriate actions are taken tomanage them (Rayner, 2009). Many of the recommendations by the Conference Boardemphasize the importance of an enterprise risk management (ERM) strategy in business. Thefollowing are a few of their recommendations regarding managing reputation risk (Tonello,2007): The Board of Directors should reach a consensus about their corporation’s reputation risk The Board of Directors should be in charge of determining the importance of stakeholder relations for the company A full-fledged ERM risk management program should be put in place for the company and management of reputation risk should be embedded into this program Directors should oversee the development of the top-down risk management program
10FLOURIS, KUCUK YILMAZ Business risks that impact reputation capital should be integrated into the risk management program at the top of the organizationIn this article, we are integrated SWOT analysis into current reputation management modelwith based on enterprise risk management perspective.The basic aim of the reputation risk management process model is to support an airline’smanagement to handle reputation risk as one of the both financial and non-financial businessrisks. Implementation of reputation risk management can increase productivity and improvebusiness opportunities in areas such as economic, environmental and social impact.The RRM framework provides a clear, pragmatic process for managing risk which haspotential to impact corporate reputation throughout the company. We assumed that, this riskmanagement based methodology will provide a proactive and holistic framework to thereputation management process. Managers will achieve a current corporate risk map owing toa risk management based management system.
11FLOURIS, KUCUK YILMAZFigure 2. Reputation Risk Management Process (Adopted from Resnick, Jeffrey T., (2006)Reputational Risk Management: A Framework for Safeguarding Your Organization’s PrimaryIntangible Asset, Opinion Research Corporation, Retrieved 10/08/2009 fromhttp://www.carma.com/Reputational_Risk_White_Paper.pdf.A SWOT analysis tailored according to the reputation risk management for airlines is the firstphase of the reputation risk management process. To do a SWOT analysis correctly vis-à-visthe abovementioned objective, reputation risk management is incorporated with the HarrisInteractive Reputation Quotient SM (RQ). The RQ instrument rates a company’s reputationon 20 attributes (each measured on a 7-point scale) that fall into six key dimensions:Emotional Appeal, Products & Services, Social Responsibility, Vision & Leadership,Workplace Environment, and Financial Performance (Harris Interactive, 2008) (see Figure 3below). The first phase of the reputation risk management process is the SWOT analysiswhich is applied according to the issues of the Harris Interactive Reputation Quotient. Thisphase aims to create useful results to identifying and prioritizing of reputation risks.Figure 3. 6 Key Dimensions and 20 Attributes Measured in the Reputation QuotientSM
12FLOURIS, KUCUK YILMAZThe most crucial stage of the reputation risk management process is identifying the factorsthat could impact reputation. Risks have to be recognized and understood before they can bemanaged. Considering the seven drivers of reputation is a useful starting point, as these arealso fertile sources of threats and opportunity to reputation (see Figure 4 below) (Rayner,2009)Figure. 4. The seven drivers of reputationOnce risks to reputation have been identified, they can be evaluated, appropriate riskresponses developed, and the risks monitored and reported. Risks to reputation can beevaluated in the usual way by considering the likelihood of the risk occurring and the impactif it does. The reputational impact of such risks should be considered explicitly, alongsidefinancial or other impacts. This can be done by the use of a word model which explainsreputational impact in a way that is relevant and meaningful for a given business. The tablebelow (Table 1) provides an example of a four-point reputation impact scale that caters forboth threats and opportunities (Rayner, 2009).
13FLOURIS, KUCUK YILMAZLow Moderate High Very highLocal complaint or Local media National media National headline/recognition coverage Moderate coverage Significant international mediaMinimal change in change in change in stakeholder coverage Dramaticstakeholder stakeholder confidence Impact change in stakeholderconfidence Impact confidence Impact lasting more than confidence Impact lastinglasting less than lasting between three months Attracts more than 12 months orone month one and three regulator attention or irreversible Public months comment censure or accolade by regulatorsTable 1. Four-point reputation impact scaleIf we chart up the prioritized risks on a pre-prepared matrix and a clearer picture will emerge.The priority risks will be seen in the top right hand corner – high likelihood and high impact.For an airline, the risk of a crash would be in this part of the matrix. With this information,steps to prevent and prepare for crises can begin. The first job is to consider if any action canbe taken to reduce the likelihood or impact of a particular risk. This could involve newprocedures, training, contingencies or communication. In some cases it could even meanceasing to do the thing that is causing the risk (Hemus, 2006).In assessing reputational impact, the view of relevant stakeholders should be considered toensure that the impact is not underestimated. That is why understanding stakeholders andwhat they regard as current and emerging major issues lies at the heart of reputation riskmanagement (Rayner, 2009).Stakeholder value, based on a company’s economic, environmental, and social performance,is a new and largely untapped source of competitive advantage that is likely to grow in theyears ahead. A disciplined approach that integrates stakeholder considerations into corebusiness strategy and operations can help senior executives and line managers create aboveaverage returns. By identifying and acting on stakeholder-related business risks andopportunities, companies can reduce costs, differentiate products and services, enter newmarkets that serve unmet societal needs, enhance corporate reputation and influence industry“rules of the game.” Success in capturing these opportunities requires new leadership and thecourage to understand and engage a diverse set of constituencies, including those previouslyconsidered adversarial or marginal to the business. (Laszlo et al, 2005).
14FLOURIS, KUCUK YILMAZ 4. ConclusionSuccessfully managing reputation risk is both an inside-out and an outside-in challenge. Theinside-out component requires business leaders to establish an appropriate vision, values, andstrategic goals that will guide actions and behaviors throughout the organization. The outside-in component requires the business to continuously scan the external environment andcanvass stakeholder opinion to ensure it is on a track that will secure the continuing support,trust, and confidence of its stakeholders. Active and systematic management of the risks toreputation can help to ensure that perception is aligned with reality and that stakeholderexperience matches expectations. Only in this way can a business build, safeguard, andenhance a reputation that will be sustainable in the long term (Rayner, 2009).Reputation management is critical to organizations and it continues to grow morecomplicated. Companies in the past could earn reputations as good corporate citizens bymaking philanthropic contributions without significant alignment with a business strategy.Today, continuous access to information means companies are scrutinized nonstop bystakeholders and the general public. Furthermore, the current recession has caused trust inbusiness to decrease dramatically. These conditions make companies increasingly vulnerableto reputational issues that can destroy market capital and viability. Organizations that are ableto build and maintain trust are better able to meet reputational challenges (Stuller, 2009).Companies are recognizing the importance of reputational risk and placing a greater emphasison reputational risk management. A survey by The Conference Board found that 82 percent ofrisk managers responding indicated their companies are making a “substantial” effort tomanage reputational risk, and 81 percent stated their focus on reputational risk has increasedduring the past three years (Jackson, 2009).We believe that our study contributed to the literature reputation risk management tied toairline sustainability by providing an enterprise risk management based perspective and a newsystematic approach by which airlines can manage their risk on this topic. Further research
15FLOURIS, KUCUK YILMAZand broader applications and empirical case studies are needed to help develop this key areaof study.References:David, S. (2009). Demonstrating a commitment to ethical conduct, Business Risk Report,Ernst & Young, 2009.Defense Acquisition University, 2009, Area 01: Risk Definition, Risk Management, ACCPractice Center, Retrieved 01/20/2010 fromhttps://acc.dau.mil/CommunityBrowser.aspx?id=184936.Doganis, R. (2006) The Airline Business, Routledge, p.1.Ernst & Young, (2009). Business Risk Report, Retrieved 01/20/2009 fromhttp://www.ey.com/Publication/vwLUAssets/Business_Risk_Report_2009/$FILE/EY_Business_Risk_Report_2009.pdfGerrit Jan van den Brink (2009), Reputation Risk, Publicaties, Finance Ventures, 2009,Retrieved 02/05/2010 from www.financeventures.nl/index.php?type=download&id=47;http://www.financeventures.nl/publicaties.html, (published by 09-08-2007).Harris Interactive (2008). The 10th Annual RQ: Reputations of the 60 Most VisibleCompanies, A Survey of the U.S. General Public, Retrieved 11/04/2009 fromhttp://www.harrisinteractive.com/services/pubs/HI_BSC_REPORT_AnnualRQ2008_SummaryReport.pdfHemus, Jonathan (2006), Crisis Management, Retrieved 01/20/2010 fromhttp://www.continuitycentral.com/feature0357.htmINCE & CO, (2009). Corporate Risk and Reputation Management, Retrieved 11/04/2009from http://www.incelaw.com/documents/pdf/Strands/Commercial-Disputes/Corporate-Risk-and-Reputation-ManagementJackson, Russell A. (2009). “Keeping Your Reputation Clean,” Internal Auditor, June 2009.JetBlue (2008), JetBlues 2008 Annual Report on Form 10-K JetBlue’s 2008 Annual Reporton Form 10-K, Annual Reports, 2008, Retrieved 11/17/2009 fromhttp://investor.jetblue.com/phoenix.zhtml?c=131045&p=irol-reportsAnnualLaszlo, C.; D. Sherman; J. Whalen; J. Ellison (2005), "Expanding the value horizon: Howstakeholder value contributes to competitive advantage", Journal of Corporate Citizenship,Vol. 20 pp.65 - 76.Rayner, J. (2009), Understanding Reputation Risk and Its Importance, Business Strategy BestPractice, Q Finance, Retrieved 01/20/2010 from http://www.qfinance.com/business-strategy-best-practice/understanding-reputation-risk-and-its-importance?page=1
16FLOURIS, KUCUK YILMAZResnick, Jeffrey T., (2006) Reputational Risk Management: A Framework for SafeguardingYour Organization’s Primary Intangible Asset, Opinion Research Corporation, Retrieved10/08/2009 from http://www.carma.com/Reputational_Risk_White_Paper.pdf.Riecken, Martin (2009), Lufthansa listed again in Dow Jones Sustainability Index, LufthansaNews, Deutsche Lufthansa AG,http://www.lufthansa.com/mediapool/pdf/69/media_718569.pdf)Schreiber, E. S. (2008), Reputation, December 02, 2008, Institute for Public Relations,Retrieved 01/20/2010 fromhttp://www.instituteforpr.org/essential_knowledge/detail/reputation/Stuller, Jay (2009), “How They See You,” The Conference Board Review, May/June 2009.The Conference Board (2009), Managing Reputation Risk and Reward, Report, #1442-09-RR5, 2009, Press Release / News, Retrieved 09/15/2009 from http://www.conference-board.org/utilities/pressDetail.cfm?press_id=3605Tonello, Matteo (2007). Reputation Risk: A Corporate Governance Perspective. TheConference Board (December 2007).What is Crisis Management? February 13, 2009,http://www.soopertutorials.com/technology/disaster-recovery/2187-crisis-management.htmlWorld Economic Forum, 2009), Industry Partnership – Travel & Tourism Revitalizing theSector Reputation, Retrieved 11/04/2009 fromhttp://www.weforum.org/pdf/ip/att/Reputation.pdf.