Daniel Diermeier: An interview by Bob Morris

Posted on: September 16th, 2011 by bobmorris

Daniel Diermeier

Daniel Diermeier is the IBM Professor of Regulation and Competitive Practice, a Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management, and a Professor of Political Science at the Weinberg College of Arts and Sciences, all at Northwestern University. He is director of the Ford Motor Company Center for Global Citizenship and co-creator of the CEO Perspective Program (Kellogg’s most senior executive education program), a joint venture between the Kellogg School of Management and the Corporate Leadership Center. Diermeier’s work focuses on reputation management, political and regulatory risk, crisis management, and integrated strategy. His work has been published in numerous academic journals in management, economics, and political science.

He is the author of the recently published book, Reputation Rules: Strategies for Building your Company’s Most Valuable Asset (McGraw-Hill, April 2011). Diermeier’s work has been featured globally in media outlets such as the Wall Street Journal, the Economist, Business Week, the Financial Times, Newsweek, the Chicago Tribune, De Telegraaf and many others. In 2001 he was named Kellogg Professor of the Year and in 2007 was the recipient of the prestigious Faculty Pioneer Award from the Aspen Institute, named the “Oscar of Business Schools” by the Financial Times. In December 2004 he was appointed to the Management Board of the FBI.

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Morris: Before discussing Reputation Rules, a few general questions. First, other than a family member, who has had the greatest influence on your personal growth? Please explain.

Diermeier: When I was an undergraduate student in Germany I had received a fellowship from the German Konrad Adenauer Foundation. This required attending a few seminars on philosophy, critical thinking, rhetoric and other topics. These seminars were conducted by Konrad Krieger, the director of the graduate program. His thinking, values, and approach to scholarship had a profound influence on me in every aspect of my work. He also taught me how to be a professional.

Morris: The greatest impact on your professional development?

Diermeier: Before I came to Kellogg and Northwestern I was an assistant professor at Stanford’s Graduate School of Business. My training had been in game-theoretical models of politics, but at Stanford I learned to apply these tools to business. David Baron, now emeritus at Stanford, had a tremendous influence on my development in this area.

Morris: Was there a turning point earlier in your life (if not an epiphany) that set you on the career course that you continue to follow? Please explain.

Diermeier: There were two. I had originally been a graduate student in philosophy, but realized that I was not suited to be a professional philosopher. That happened during a year at USC. The second turning point was my time at Stanford and the influence of David Baron.

Morris: To what extent has your formal education proven invaluable to what you have accomplished during your career thus far?

Diermeier: My background has always been inter-disciplinary. I had a very good education in logic and then game-theory, but also had studied philosophy and even a year of musicology. Recently, I have become interested in psychology and linguistics. A topic like corporate reputation is multi-faceted and helps dramatically to be able to view in from different perspectives and integrate these perspectives into a new holistic view.

Morris: In recent years, MBA programs – even those offered by the most prestigious business schools, such as Kellogg – have been severely criticized. In your opinion, what is the one area in which there is greatest need of immediate improvement?

Diermeier: Business schools have failed to understand and reflect on the role of business in society. Corporations have become the main engines of economic, social, and cultural change, and are being held accountable for the consequences of these changes by an increasingly skeptical public. Companies need to address these challenges whether they want to or not. Corporate leaders thoroughly understand this, but many business schools still act as if these issues can conveniently be ignored.

Morris: Look ahead (let’s say) 3-5 years, what do you expect to be the single greatest challenge that CEOs will face? Why? Any advice?

Diermeier: To overcome an ongoing erosion of trust at a global scale. To counter these trends companies need to develop reputational management capabilities.

Morris: Now please shift your attention to Reputation Rules. When and why did you decide to write it?

Diermeier: I had the good fortune of serving for seven years as the academic director of the CEO Perspective Program, a joint venture between Kellogg and the Corporate Leadership Center. This program is designed for direct reports to CEOs of large, complex organizations. As part of the program we invited CEOs of the world’s leading companies into the classroom for a candid dialogue with our participants. I was struck by how often these CEOs mentioned “reputation,”“brand” or “trust” as one of their main concerns. “People” was the only other topic that came close. That said, at the same time we all saw one reputational crisis chasing another. And in contrast to the accounting crises a decade ago (Enron, WorldCom, Arthur Andersen), these crises could be connected to any aspect of the business such as supply chain management, quality, safety, but also executive compensation or board governance. Together this suggested to me that (a) CEOs are right to put reputation on the top of their agenda, and (b) most companies do not know how to build and defend their reputation effectively.

Morris: What differentiates it from other books that also examine reputation management?

Diermeier: I think there are two main differences. First, reputation management is still largely viewed as part of corporate communication. That is, it is essentially about communicating in the right way. Of course, effective communication is a critical component of reputation management, but effective reputation management needs to be integrated into business practices. It is about doing things differently. Companies need to think about reputation management as a capability, like quality management and customer-focus. That requires the right mind-set as well as processes and a matching culture and values. Second, many reputation and crisis management books are based solely on the experience of practitioners. This book draws heavily on rigorous research, some my own, some from various areas of the social sciences. My sense is that we need to take this area as seriously as other areas in management and developing new insights that go beyond best practices is critical. That said, I worked hard on making the book easily accessible with many case studies, examples, and practical tools.

Morris: Were there any head-snapping revelations while writing it?

Diermeier: I was struck how underdeveloped the reputation capabilities of many companies are. Managers love to build brands and reputations but they fail to build capabilities to defend and sustain them.

Morris: To what extent (if any) does the book in final form differ from what you originally envisioned? Please explain.

Diermeier: There were few major changes. I had been thinking about this topic for a while and had developed a successful course on crisis and reputation management. What did happen was that processes and culture starting playing a more important role.

Morris:  As I heard the account, Clare Booth Luce once suggested to newly elected president, John Kennedy, that a great man’s reputation can be described with one sentence. For example, “He preserved the union and freed the slaves” or “He lifted us out of a great depression and helped to win a World War,” obviously referring to Abraham Lincoln and to FDR. Can the same be said of a corporation’s reputation? What do you think?

Diermeier: That would be a very positive case. Some companies have attained that level of clarity. Many have not.

Morris: Why don’t more C-level executives understand view reputation as a valuable asset and manage it – not manipulate it — with much greater care?

Diermeier: What we have is a similar trajectory as in other cases such as quality management, customer focus, or the people process. It takes a few years to realize that the business environment is changing and that a more comprehensive approach is needed. Reputation is a complex phenomenon that requires an enterprise-wide approach. Today it is still viewed as a special function that can be delegated to experts. This is exactly how CEOs initially thought about quality, people, or customer-focus. Only after a few years did leaders realize that they needed to build a core capability.

Morris: Of course, reputation is a double-edged sword. Some companies recover from a bad reputation, others do not. If retained by a company to help it repair its bad reputation, where would you begin? Why?

Diermeier: The cure is very much issue and company specific. Sometimes, the bad reputation is indicative of far deeper problems. But no matter what the cause is, the approach must go beyond rhetoric; it can’t be about “spin.”

Morris: With people as well as with organizations, there is only one opportunity to make a first impression. What is your advice to start-ups or to new owners?

Diermeier: It is utterly critical to be clear about the company’s identity and then build business processes and a culture that reflects the identity.

Morris: However different they may be in most other respects, what do the companies that have the best reputations share in common?

Diermeier: The understanding that reputation management is not only about communicating but must be deeply integrated into business processes. They also possess the strategic maturity that an increasingly skeptical public may see them differently than they see themselves. Rather than feeling sorry for themselves they must accept this as part of their business environment and tackle it like any other business challenge.

Morris: What are the defining characteristics of a reputation builder/preserver?

Diermeier: It is imperative to possess a deep understanding of the identity of the given organization and the ability to view the organization from multiple perspectives, even if these perspectives are critical or suspicious of the company’s motives.

Morris: What are the defining characteristics of a reputation reducer/detractor?

Diermeier: As already indicated, I think two are essential: A focus on short-term success and an inability to view issues from alternative viewpoints.

Morris: In Chapter 1, you discuss “the decisive moment.” What is it and what is its unique significance?

Diermeier: Reputational crises are also opportunities. In a reputational crisis a company is on stage. Audiences are paying attention to the company and its management. Because they pay attention, they remember, sometimes for a very long time. We still remember the Tylenol crisis (almost 30 years later) or the Exxon Valdez oil spill (over 20 years later). How a company conducts itself in a moment of crisis can thus have a significant and lasting effect on its reputation, for better or worse. Managers need to appreciate this and seize the decisive moment.

Morris: For those who have not as yet read Reputation Rules, what are “The Katrina Chronicles” and what are the most valuable lessons that can be learned from them?

Diermeier: During a reputational crisis, companies frequently focus too much on who is at fault. The key is to recognize is that what matters most is that during such a crisis the company is “on stage”. Customers and other stakeholders pay attention and that may have a lasting impact on their perceptions, positive or negative. Natural disasters or terrorist attacks, while usually beyond the control of a company, can also create such decisive moments. Now the challenge is how the company responds to a natural disaster. Walmart’s well-planned and executed relief efforts after Hurricane Katrina provide an example of how such events can provide opportunities for companies if they appreciate the opportunity and seize it.

Morris: What are the principal causes of most reputational challenges? How best to prepare for them? To what extent (if any) can they be avoided?

Diermeier: The two main factors that drive reputational concerns are moral outrage (a recent example is executive compensation, especially perks) and fear (consider the ongoing concerns about genetically modified organisms in Europe). This is particularly acute if the underlying events are amplified by media coverage and activists’ campaigns. In the book I design tools based on modern research on risk perception and moral psychology that can help to identify the intrinsic risk of issues, products, or business practices before they create a problem.

Morris: In my opinion, some of the most interesting material in the book is provided in Chapter 8. What is the A.I.M. Team? What are its responsibilities? Who are its members?

Diermeier: AIM stands for anticipatory issue management, an approach now used by some leading companies to identify reputational risks before they occur. AIM teams can be fairly small and should effectively fulfill an intelligence function: identify emerging risks and provide action alternatives that can then be presented to management for decision. Intelligence capabilities are particularly key in the context of reputation management as issues can arise from anywhere. Properly executed they can serve as a “sixth sense” of the reputation management process.

Morris: What is “The Awareness-Control Trade-Off.” What is its specific relevance to reputation management

Diermeier: One systematic problem in the reputation management process is that the control over an issue is highest early in the life-cycle of an issue, before it hits the front page. Unfortunately, during these early stages companies are usually unaware of such issues, in part because they have not as yet made an impact or attracted public interest. This is a fundamental trade-off that can be alleviated with a proper intelligence process such as an AIM team.

Morris: You observe that a well-designed intelligence process has three components: issue identification, issue evaluation, and issue monitoring. Of the three, which do most organizations seem to have the great difficulty getting right? Why?

Diermeier: Issue identification. It is the same problem of “unknown unknowns” made popular by Donald Rumsfeld in the area of national security, now applied to companies. We can’t proactively manage what we are unaware of.

Morris: In your opinion, what are the most valuable lessons to be learned from Arthur Andersen insofar as reputation mismanagement is concerned?

Diermeier: Culture is a critical and underappreciated aspect of building and protecting a corporate reputation. At the end of the day,  people must make the decisions that can enhance or undermine a company’ reputation, and here culture and shared values are critical. In the case of Arthur Andersen a strong culture had slowly eroded over the years. Some pre-Enron crises could have been used as teachable moments to reinforce Andersen’s culture, but these opportunities were missed because of an exclusive focus to limit legal liability.

Morris: Who should be centrally involved in formulating an organization’s reputation management strategy? Should they also be involved in designing the program to implement it?  Please explain.

Diermeier: It starts with the CEO supported by a decision and intelligence process. I prefer a reputation management council that mirrors the company’s organizational structure over a Chief Reputation Officer, because it guarantees a tighter fit with the business and core corporate functions. This council needs to report to the COO or CEO and maintain oversight over the reputation management process.

Morris: Long ago, Thomas Edison observed, “Vision without execution is hallucination.” Here’s my question: What specifically is required of those who are primarily responsible for implementing a reputation management program?

Diermeier: A good approach is to have the reputation council oversee execution supported by an AIM team. The implementation can be driven by the team or a dedicated function drawn from communication, legal, regulatory and some core business areas or regions.

Morris: What are the three components of a strategic mindset? Of the three, which do most executives seem to find most difficult to master? Why?

Diermeier: The three components are strategic thinking, situational awareness, and avoiding the expert trap. Of these, the expert trap is most common. The problem is that managers are all experts at something and highly prized for their expertise. But expertise consists in seeing the world in a particular, highly structured way. This ability to see patterns where lay people are overwhelmed by complexity is extremely valuable in calm times, but in a crisis it leads managers to focus too much on the technical aspects of a problem. For example, dismissing customer concerns and fears, especially if these fears are not well-founded. To over-simplify: in good times all managers are marketers. In a crisis, they are all engineers.

Morris: Before concluding your brilliant book, you observe, “Reputation management is not a corporate function, but a capability.” Who within an organization (whatever its size and nature may be) should develop this capability? To what extent can an organization help to accelerate that development process? Please explain.

Diermeier: It must start with the CEO and the support of the board. Developing a reputation management capability requires the input and advice of experts, but should never be delegated to them. It needs to be taken as seriously as developing a capability for high quality or customer service. Developing a capability requires the right mind-set, supported by well-designed process and a lived culture with shared values.

Morris: Which question had you hoped to be asked during this interview – but weren’t – and what is your response to it?

Diermeier: I just want to thank you for the opportunity!

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Daniel Diermeier cordially invites you to check out the resources at these websites:

http://www.kellogg.northwestern.edu/Faculty/Directory/Diermeier_Daniel.aspx

http://www.kellogg.northwestern.edu/reputationrules/

http://www.ceoperspectives.net/CEO-Perspectives-Daniel-Diermeier.html

http://www.youtube.com/watch?v=ThDG89I1Jn4

http://reprules.wordpress.com/author/danieldiermeier/

 


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