Managing Reputation Risk: The Two-Way Street of Due Diligence
Managing reputation risk is a critical aspect for both businesses and investors. We know that reputation can make or break a company, influencing consumer behavior, investment decisions, and overall business success.
Conducting thorough due diligence for both investors and their potential portfolio companies is essential, not just to understand the financial health of both parties but also to gauge their reputations. This two-way street is vital for protecting investments and ensuring long-term value creation.
The Importance of Due Diligence
Due diligence from a reputation management perspective requires a deeper dive than simply skimming the surface. While many brands focus on how they appear on the first page of search engine results, effective reputation management goes much further.
Up to 20% of firms believe that Google’s portrayal of their business is unfair, impacting customer interest and engagement. Trusting online reviews is equivalent to a personal recommendation for 83% of consumers, underscoring the importance of a positive online presence.
In a survey, 88% of executives stated that their companies actively manage reputation risk, recognizing that around 95% of web traffic never goes beyond the first page of search results. Additionally, 49% of managers acknowledge the direct link between their CEO’s reputation and their brand’s standing. More recently, with new AI software such as ChatGPT being released, industry leaders are seeing an increase in this new tech being used for research, searches and due diligence. Finding new methodologies to influence results on these platforms has become an important part of the comprehensive reputation risk management strategies that managers understand is crucial.
Investors: The Frontline of Reputation Risk Management
Risk management - Seinfeld
For investors, managing reputation risk is paramount. A Deloitte survey revealed that 90% of over 300 executives ranked reputation as the most significant risk area for companies. Investors must ensure that their portfolio companies comply with current and forthcoming regulations, such as the EU AI Act. Regular checks on potential investments and existing portfolio companies against these regulations are essential.
Moreover, investors need to scrutinize the other entities associated with their portfolio companies. Being linked to organizations with tarnished reputations can lead to guilt by association, affecting the entire portfolio. Therefore, having a compliance expert and a robust reputation management strategy as part of the communications plan is vital.
A former client of Percepto’s had concerns when they brought on a board member, who had received some negative attention in the press from activity when working at another company. We worked with the client to minimize the reputation issues and restructure the board members narrative. As a result, the client never had any unwanted associations made.
Startups and Due Diligence on Investors
Moreover, startups and potential portfolio companies must too conduct thorough due diligence on their potential investors to avoid reputational damage. Aligning with investors who uphold strong ethical standards and have a positive track record is crucial. An association with investors involved in questionable practices or controversial activities can tarnish a startup’s reputation and deter potential customers, employees, and other investors.
By vetting investors meticulously, startups can ensure they partner with those who share their values and vision, thereby safeguarding their own reputation and fostering a trustworthy, sustainable business environment. This proactive approach helps in building long-term credibility and success.
One client with whom we worked at Percepto had faced a similar issue with founders of potential portfolio companies, due to being linked to an earlier investment that had some unwanted press. In fact, the client had exited from the company two years previous to any controversy but was still connected to the startup. Through reputation management, we were able to tell the true story and explain the incident through a new narrative.
Digging Deep with New Hires
Founders play a crucial role in managing reputation risk, particularly in the context of hiring and maintaining a positive workplace environment. Conducting thorough background checks on employees is essential, as a bad hire can severely impact a company’s reputation. Nearly 70% of prospective employees indicate that they would reject a job offer from a company with a bad reputation, even if they were unemployed. Additionally, 80% of employers have rejected candidates based on information found online.
For companies aiming to attract top talent, maintaining a good reputation is crucial. About 69% of job seekers prioritize a company’s reputation over other factors when searching for a job. This competitive market necessitates that companies work diligently to build and sustain a positive reputation to attract the best talent. Excellent reviews on platforms such as Glassdoor, which showcase and rate places to work are a crucial part of maintaining a good reputation as an employer.
The online reputation of job applicants significantly influences hiring decisions. Up to 85% of human resource managers in the United States use online searches to learn about the reputation of job applicants. This thorough vetting process highlights the importance of a clean and professional online presence for individuals and underscores the broader significance of reputation management for companies.
The Consumer Perspective: Reputation and Business Success
Consumers are highly influenced by a company’s reputation. A negative online reputation can drastically affect consumer behavior, with 90% of consumers avoiding businesses with poor reputations or reviews, especially on the larger review platforms such as Apple Store, iStore and Trustpilot. This consumer behavior underscores the necessity for businesses to manage their reputation actively.
Incorporating reputation management strategies into the overall business plan can help mitigate risks and enhance consumer trust. This includes monitoring online reviews, engaging with customers proactively, and addressing any negative feedback promptly and effectively.
Vital in all directions
Investors must conduct thorough due diligence not only on the companies they invest in but also on the other portfolio companies and associations those companies have. This comprehensive approach helps in identifying potential risks and ensuring that the investment is sound from all perspectives, including reputation.
Managing reputation risk is a critical component of due diligence for both investors and startups. A study by TrustPilot revealed that consumers rank a positive internet reputation as the number one factor when choosing a business, even above the quality of products and services. This highlights the importance of a positive reputation in driving business success.
By understanding the potential threats to a company’s reputation and implementing proactive risk management strategies, investors can protect their investments and contribute to the long-term success of the companies they invest in. As the business environment continues to evolve, the importance of managing reputation risk will only grow, making it an essential focus for prudent investors and forward-thinking founders.
Percepto has been helping founders to build, maintain and improve their online narratives since 2007. For more information on how we can help you assess potential reputation risks, take control of your story and position you as a thought leader and industry expert, contact us using the below details.