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Volkswagen scandal highlights reputational risk

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QUEBEC CITY — Volkswagen A.G.'s recent troubles serve as a critical reminder of the threat posed by reputational risk and the importance of proactively managing it, a public relations expert says.

The German automobile manufacturer is in the midst of a major controversy after the U.S. Environmental Protection Agency and the Sacramento-based California Air Resources Board alleged that millions of Volkswagen and Audi cars include software that circumvents the federal agency's standards for certain air pollutants.

“What will you do to make sure your organization does not become the Volkswagen of tomorrow?” Michel Bergeron, Montreal-based senior vice president for marketing and public affairs with the Business Development Bank of Canada, asked attendees of the 2015 RIMS Canada conference Wednesday in Quebec City.

Volkswagen said it will recall and repair 11 million vehicles worldwide that have the software, an effort that some analysts said would cost the company $6.5 billion, according to Reuters. The company lost a third of its value in just a matter of days, Mr. Bergeron observed.

“This is a major hit for all shareholders,” he said. “There's an important economic value associated with reputational risk.”

A 2014 study by consulting firm Deloitte L.L.P. found that 87% of executives rated reputation risk as more important than other strategic risks.

“Negative reputation impacts both your brand and your bottom line, and one effect of negative reputation is you lose your credibility,” Mr. Bergeron said.

Tools to manage reputational risk include training employees to reject business opportunities that could generate risk, questioning and evaluating foreign suppliers' rules and processes, developing contingency plans and monitoring social media mentions of the company, he said.

“It's difficult to insure against reputational damages, and those damages are very difficult to quantify so in most cases companies have to self-insure and proactively manage these risks,” Mr. Bergeron said.

Five “do's” that he listed for managing a crisis are:

• Act fast

• Own the message

• Involve the CEO

• Be honest and genuine

• Fix the problem

He cited Saint-Anselme, Quebec-based Maple Leaf Foods Inc.'s response to a listeria outbreak that killed more than 20 people in 2008. Maple Leaf CEO Michael McCain made a video in which he personally apologized for the breakdown in the company's food safety processes and assumed full responsibility for the outbreak, a move that allowed the company to maintain its brand value and market share, Mr. Bergeron said.

“This is a textbook example on how to properly manage a crisis,” Mr. Bergeron said, adding that Maple Leaf likely admitted fault against the advice of its lawyers. “Your first battle is in the court of public opinion, not the court of law.”

On the other end of the spectrum was Waldorf, Connecticut-based caterer Centerplate, which initially allowed former CEO Desmond Hague to remain in his job despite video surfacing last year of him kicking a dog, Mr. Bergeron said. Mr. Hague apologized and pledged $100,000 to an animal welfare fund, but the social media fallout was so intense that Centerplate customers such as the San Francisco 49ers football team were drawn into the controversy and started complaining about the reputational risk it posed to them.

“The company took a stance that this was a personal matter not relevant to the corporation,” Mr. Bergeron said. “Social media users or the public in general thought otherwise. The soft and slow response by the board created a feeling that they did not take this seriously, thus damaging the reputation of the corporation longer than what was necessary.”

Mr. Hague resigned from Centerplate a week after the incident.

The Centerplate incident and the Volkswagen scandal highlight the importance of avoiding Mr. Bergeron's five “don'ts”:

• Don't ignore

• Don't wait

• Don't deny

• Don't lie

• Don't think about your interests