Tarnished reputation is first symptom of deeper malaise

WARREN BUFFET famously said it takes 20 years to build a reputation and five minutes to destroy it.

Over the past few weeks, we have witnessed the reputations of some of the world's leading financial institutions, regulatory authorities and governments put to the test. For some, like Lehman Brothers, the impact has been devastating.

What lies at the heart of the problems which have beset the world's financial infrastructure and which have, in turn, severely dented the confidence and trust of ordinary citizens is a serious underestimation of risk.

Take Lehman Brothers, for example. The bank's overexposure to the US subprime mortgage market would appear to have cost Lehman its licence to operate but there is little doubt that its reputation was seriously undermined along the way as investors began to question whether the firm was coming clean about the true extent of its commercial and residential mortgage losses.

The gradual erosion of Lehman's reputation in recent months contributed to the demise of the firm. The perceived disconnect between what the firm was saying and what it was doing fractured a fundamental axis upon which a sound and sustainable reputation is based. Effectively, Lehman lost the confidence of the markets and the rest is history.

It is now generally accepted that these stages are common to the development of a reputation crisis.

• Denial: A problem surfaces but the attitude adopted is that it's not a major issue. It will go away.

• Delegation: The problem doesn't go away but rather than deal with the "hot potato", senior management delegate responsibility to more junior staff or external parties.

• Deception: When delegation fails to contain the issue, heads get buried in the sand and, more worryingly, attempts are made to conceal the truth.

• Deflection: When this tactic is met with disbelief, the blame game starts. It's always someone else's fault.

• Damnation: Eventually the problem gets totally out of control. Destruction: Reputation is the first casualty of what is now a full -blown crisis and is soon followed by a tangible business impact.

• Displacement: Eventually someone, usually very senior, pays the price with their job and others soon follow.

• Diffusion: Ultimately, and only after painful corrective actions are taken, key stakeholders' interests align themselves and the crisis abates.

Or, if the above actions are not taken or are ineffective:

• Demise: The organisation pays the ultimate price and goes out of business

So is there anything organisations can do to safeguard against risks that have the potential to ruin reputation and derail their business?

Where an issue or risk is unavoidable, organisations should consider the following approach.

• Take the potential risk seriously and don't assume that "it will never happen to us".

• Establish a clear understanding of the risk or issue, including a rigorous assessment of key external stakeholder perceptions. Sometimes organisations place too heavy a weighting on the internal perspective, which can be either too insular or misaligned.

• Harness clearly defined and practised management structures and processes in communicating with stakeholders around the issue or risk. Using ad hoc or informal processes is a fast-track approach to making a bad situation worse.

• During a crisis, time is of the essence and people are under immense pressure to perform. How organisations respond during what in emergency medicine is termed the "Golden Hour" often sets the tone.

A detailed, pre-agreed and rehearsed crisis management process is essential to delivering an effective response.

These actions will help to retain the support of important stakeholders at a time of crisis and, where necessary, buy sufficient time to enable management to address the basic problem. Ultimately, if executed properly, these measures can actually enhance an organisation's reputation over the medium to longer-term.

• John Keilthy is managing partner of Reputation Inc