Werth Insights

Boards Can’t Afford to Overlook Reputational Risk

Boeing can’t seem to stay out of the news these days, and for all the wrong reasons. 
 
More than a dozen family members of Boeing 737 MAX crash victims confronted Boeing CEO Dennis Muilenburg during his testimony this week before the Senate Commerce Committee asking for an apology. 
 
Meanwhile, the company faces multiple lawsuits and investigations, including a criminal probe. Earlier this month, the company’s board stripped Muilenburg of his chairman title and last week fired Kevin McAllister, president and CEO of Boeing Commercial Airplanes. 
 
However, these actions come almost one year after the first MAX crash. It’s becoming clear from analysts to investigators that a lack of swift and decisive action, coupled with a miscalculated view of reputational risk, is proving to be costly. Two analysts downgraded Boeing stock, causing share value to plunge. 
 
As early as last April, Crain’s Chicago Business quoted Nell Minow, vice chair of ValueEdge Advisors, who said the board had deferred too much to management in the time since the crashes. Though Minow said directors may have been making all the right moves behind the scenes, investors and the public should have heard from them as well as executives, and they “just haven’t been out there enough.”
 
Almost every corporate board and many nonprofit boards regularly consider risks related to financial performance, quality, ethics, safety, security and social responsibility. We don’t know whether reputational risk is one the Boeing board assesses. But because reputation is tied to every other risk, many boards are lulled into believing if they take care of the other risks, reputation will follow. 
 
In fact, boards should be focusing on reputation as its own category.
 
The Boston-based Reputation Institute says that, on average, a 1-point change in public perceptions is worth 2.6 percent of a company’s market value. The institute’s researchers estimate that 65 percent of Amazon’s market value can be attributed directly to its good reputation. 
 
Because boards don’t have responsibility for day-to-day operations, they can’t be expected to know where all the quicksand is. That makes asking and answering the following questions critical:
  • Where are we most vulnerable to reputational risk? 
  • Is the management team committed to addressing these vulnerabilities? 
  • What can we do to minimize reputational risk?
  • Do we have the procedures and resources in place to manage a reputational crisis if one occurs?
  • Is our board clear on its role in a crisis and are we prepared to act accordingly?
Board members have a fiduciary obligation to protect shareholder value and can be held liable for not doing so. That responsibility includes asking the hard questions and holding management accountable for protecting a company’s most important asset: its reputation. The Boeing board is learning this lesson the hard way.