Cost of Controversy — How To Have a Reputational “Moat” in an Age of Transparency
Have you read the business news headlines lately? Fraud! Sexism! Hacks! Bias! Hijinks! So. Much. Drama. You can’t make this stuff up. (Except when you can. Fake News!) The scandals just keep coming.
It’s not just isolated incidents anymore, it’s a pattern happening across a number of companies & industries. How much controversy can any given company withstand before a protest campaign, a valuation collapse, someone getting ousted or worse, indicted? One can look at the situation on a case-by-case basis but I am more interested in the overarching trend, its costs and its opportunities.
It’s no secret that we’re pretty deep into an era of transparency — when a brand or business acts up, we know about it and the news spreads faster than you can hashtag. Customers readily can, and will, judge a brand both on product and on its way of doing business. Movements surface overnight in favor of a company or against it. No company gets it right every time. But there are ways to stay out of the fray or recover when you can’t.
In the investment world we love to talk about moats. A ‘moat’ is a way of referring to a startup as having some attribute that makes it harder to compete with. When it comes to competitive positioning, you want as wide a moat as possible. Well I’m going to throw out a new term — “reputational moat”. I’m defining a reputational moat as the amount of trust and goodwill any brand or company has to absorb scandals and missteps without major consequence.
A brand with a wide reputational moat has customers who are loyal ambassadors — they love your product, they talk about your product online and offline, they believe in what you are doing. I believe you build up a reputational moat with time and consistency. (And contrary to the popular opinion, I actually think you often destroy one the same way, from behind the scenes.)
In the past reputation was managed through PR and veneers. Brands pushing out a canned message that may or may not match reality to a passive (often indifferent) consumer. But nowadays, that rubs people wrong. No brand is going to be perfect all of the time and appeal to everyone. Phoniness is creepy. Consumers have an appetite for an experience of authenticity. We’re more responsive to consistency and transparency. And unless you have an unexpected delight hidden under your sleeve, loyal consumers are not thrilled with surprises.
And this is where the reputational moat is important. Let’s say a business suddenly has a serious PR *situation*. How long will it take for its reputation and its users to recover? Often it will depend on some combination of a) how much good will you have stored up with them, b) how egregious the offense, c) how well you respond and d) how viable the next best alternative is.
But I think there is a less-discussed, perhaps-equally-important cost to being embroiled in sustained or repeat scandals. And that is the cost to a company’s team & future recruitment. This is true regardless of company size. If the talent that builds the business and delivers the goods loses heart, it’s costly in more ways than one. There’s an internal reputational moat as well as a public-facing one.
Finding and keeping good people never stops being one of the hardest and most important parts of doing business, especially as a startup. And when talent is at a premium, the belief in what you are building and the status or sense of belonging that comes from being a part of it can make the difference between going with one job offer or another. Without this connection to the culture/mission/status, you are simply bidding in a mercenary market for talent that may or may not have internal motivation to stick around.
Financial incentives will get warm bodies in the door but motivational alignment will keep them there over time and when things get rocky. When good employees have viable alternate job prospects, loyalty is hard to buy. (And folks who have lost the faith but are hanging around just for their stock options aren’t great for company morale either.)
If a scandal is connected to a fundamentally toxic company culture, the internal reputational moat will likely be narrower. However, if the culture and relationships are strong, the team can be the hidden advantage, seeing the company through the storms to come out of the other side stronger.
