In 2000, for instance, civil rights activists from various anti-sweatshop groups directed a wave of protests at Target, with picketing outside of stores in Milwaukee, Pasadena, Calif., and scattered spots in between. The company conducted no fewer than four audits of its Nicaraguan factory, and no evidence of abusive working conditions was ever revealed.

“At every board meeting, we would grill management about the sweatshop issue,” recalls George, who is also the founder and former chairman of Medtronic, also based in Minneapolis. He stepped down as a Target director in 2005, but still sits on the boards of Novartis, ExxonMobil and Goldman Sachs. “We’d just pepper them with questions. ‘What are you asking your suppliers? Are inspectors checking frequently? And is the factory that you and they are seeing the real production facility or just a facade?’ ”

The barrage of questions did not eliminate the risk associated with manufacturing in low-wage countries, but George says it was the only way directors could get some reassurance that if a retailer’s name ended up in the headlines for, say, using unpaid prison labor, the name wouldn’t be Target’s.  As he sees it, maintaining the company’s reputation is at the heart of a board member’s responsibilities, part and parcel of boosting shareholder value.  “It can take a company 100 years to create a reputation for quality, service and reliability that is above reproach,” George says. “And that reputation can be destroyed in 100 minutes.”

Reputation, that intangible but vital asset, can be quantified, according to the New York–based public relations firm Weber Shandwick, which has commissioned surveys on the value of social responsibility and reputation.  The results indicate that companies with strong track records in these areas draw more customers and maintain value better in the midst of financial-market shocks. One Weber Shandwick report cites Anne Mulcahy, chairman and CEO of formerly troubled Xerox, on having a good reputation: “It was like money in the bank. It gave us a reservoir of goodwill that we could draw upon in our hour of need.”

But as more consumers and investors pay closer attention to socially responsible corporate behavior, the challenge of managing reputation risk has also exploded, particularly because most companies now have to monitor their reputations in far-flung parts of the world.

“An issue can erupt in one part of the world where the company does business that may feel distant to the board members,” says Leslie Gaines-Ross, whose full-time engagement with the subject is reflected in her title: chief reputation strategist at Weber Shandwick. “But wherever it’s happening, you can count on a local issue becoming national and ultimately global, thanks to the Internet. And you can also count on the media to publish a Hall of Shame—a list of the directors of the company responsible for whatever misstep took place, along with their ages, their backgrounds and any other board affiliations they have.”

The Director’s Plan of Action

In most cases, a director’s role in guarding against reputation risk lies in helping management identify weaknesses in processes and controls. “You can’t just ask about quality control on the final product if your goal is to be sure the product isn’t going to end up being recalled,” says Ton Heij-men, a senior advisor for offshoring and outsourcing at the Conference Board, a New York–based business research organization. “The board needs to be sure that management has the right policies in place throughout the whole process, starting with whether they are agreeing to deals with the right joint venture partners or contractors.”

ask the right questions. “There aren’t enough hours in the day for a board member to consider every detail that could go wrong with all the company’s overseas operations,” says Steve Wagner, the managing partner of the Web-based Deloitte Center for Corporate Governance. “At least a part of this is being able to trust what management is telling you.”

Before accepting a board seat, research the company’s business lines and the countries in which it operates, then try to determine what types of hot-button issues might arise. If the company is doing business in countries that are notoriously dangerous or have poor records in human rights, it is helpful to know upfront exactly what the issues are—perhaps by summoning security experts or human rights groups to make presentations to the board. Only then can board members gauge how well management is addressing those risks.

demand evidence. “Directors need to see evidence that a process for thinking about this stuff exists, and that it’s being followed,” says James DeLoach, a managing director at Protiviti, a Houston consulting firm that advises boards on a range of issues. That means, for instance, making sure that policies are set for the way things as various as employees and toxic chemicals are handled, whether it’s in Cincinnati or Cambodia—and that those policies are followed as scrupulously in the latter as in the former. “If the company is dealing with vendors, then the board member should be trying to be sure that the supplier shares the same values that the parent company has, and is just as committed to its own reputation,” DeLoach adds. The more distant or remote the relationship, the more difficult it may be to detect a problem in the offing—but the fact that an issue was really caused by a contractor will not limit the damage to the parent company’s reputation.

 As a director, you should take extra steps to stay on top of the different kinds of issues that might emerge overseas. Cultural sensitivity is one key item: If your company has a production facility in Indonesia, the world’s most populous Muslim-majority nation, but serves up ham or pork at the company canteen, that is going to damage its reputation locally.  And word will spread.

Other issues will require specialized knowledge. “No director is going to be able to hop on a plane and visit a nuclear reactor to see if it’s about to spring a leak—that’s just not practical,” says Dennis Block, a New  York partner in the law firm Cadwalader Wickersham and Taft. But it is perfectly reasonable to ask management to report back on steps they have taken to be sure that aging nuclear reactors the company might be managing or supplying parts to are not vulnerable to accidents or even sabotage.

see it for yourself. Visiting remote locations where the company does business is always a good way to find out what is really happening. “No director should ever wake up on a Monday morning and be surprised by a newspaper headline; that’s just good practice,” Block says.

Besides being preemptive, frequent visits are good for the company’s reputation abroad. “A trip by the most senior people within an organization to a location is going to give a very powerful message that this company cares about more than just the profits coming from the business,” says Deloitte’s Wagner. “That is likely to make people on the ground more alert, more careful.”

in a dilemma, consider all sides carefully. It was one of those classic tests of ethical values. In 2006, Bill George and his fellow Novartis directors had to make a trade-off between the company’s best interests and its reputation. An Indian company had copied Gleevec, a leukemia drug. “We challenged that in court, and we were being severely criticized by nongovernmental organizations for not just giving the drug away,” George recalls. “Our reputation—and our sales—took quite a hit in India,” and the ripple effects were felt elsewhere. “But,” he explains, “we were trying to recover a billion-dollar research investment.”

Ultimately, George says, Novartis’ management opted to no longer conduct research in India, due to the apparent lack of patent protection—limiting not only future financial risk, but also the risk of repercussions if a poorly made generic were to harm patients.

directors can’t desert the ship. Once risk management turns to crisis management, it is up to management, not the board, to devise a strategy to repair the company’s reputation—which can take three years or more, according to  Weber Shandwick. “The board can try to understand what part of the process went wrong, and summon independent consultants to advise on what needs to be fixed,” Gaines-Ross says.

Of course, if the CEO and the management team fail to act, or if some lapse in judgment was responsible for the crisis in the first place, the board can replace them.

“There’s no question this is one of the toughest situations that directors can find themselves in,” DeLoach says. The time to resign is before a crisis erupts, after identifying a risk that others in the company are overlooking or downplaying, he says. Resigning after a problem hits the headlines may turn the company’s problem into a personal one, because it is more likely to expose a director to litigation, not only from people who feel they have been harmed by the company’s actions or inaction, but also from shareholders. “Once the trouble is there,” notes DeLoach, “your role is to do what shareholders expect you to, and protect their interests.” 

Suzanne McGee is a freelance journalist based in Brooklyn.

THE DOWNSIDE OF GOING GLOBAL

Senior managers are always happy to extol the upside of going global at board meetings, but discussions of this particular downside are almost as rare as pessimistic CEOs. Yet along with every dollar of additional sales or savings abroad comes an undetermined amount of extra reputation risk.

Manufacturing goods in foreign countries gambles a company’s future on risks and variables that well-meaning executives and directors cannot begin to imagine. What happens if your production facility is discovered to be polluting, knowingly or not, the local water supply with industrial chemicals? What if you are doing business in a country, such as Myanmar, that stages a violent crackdown on peaceful protests by its citizens? What if your local managers are discovered paying hefty bribes to local politicians, or even criminals, in order to continue doing business without harassment? What if your firm is rumored to be relying on sweatshop or prison labor?

Activists of various stripes have become increasingly successful at dragging such issues into the spotlight. “Basically, your customers don’t really care whether your products are manufactured around the corner or in China or Timbuktu,” says James DeLoach, a managing director at the Houston consulting firm Protiviti. “But any quality or other issue involved in those operations that becomes public is going to impact your reputation. The headache is that minimizing reputation risk related to what you’re doing in China or Timbuktu is a lot more challenging.”

Just how challenging became clear in 2007 as a number of consumer-product companies, selling items as diverse as pet food and toys, reported a series of quality issues emanating from their Chinese manufacturing facilities. Mattel alone recalled more than 10 million toys, some containing lead and others posing choking hazards. In the eyes of consumers, investors and governance experts, Mattel was to blame, even though the products were made by subcontractors; what mattered was that Mattel’s executives—and by extension, its board—failed to develop the kinds of policies and procedures that would prevent such a giant misstep.  —SM