“Could it happen here? The environmental disaster that followed the blow-out of the Deepwater Horizon rig in the Gulf of Mexico has shown that deep-water drilling is indeed a hazardous activity. . . Like the big banks, big oil needs to be restrained.” – The Independent, 10 June 2010.
As BP is an oil company, its massive Gulf of Mexico oil spill has significant consequences for Shell, Exxon, and other oil firms. The tar ball that spread across the Gulf is also spreading across the oil industry, gumming up oil firms’ reputations and darkening their collective futures.
These types of situations, where events at one firm can damage the success and survival of entire industries, can be conceptualized as reputation commons problems, where the commons is a resource that is collectively owned and jointly used. Examples abound across a broad swath of industries, with the BP disaster as just the most recent. These sorts of problems arise because stakeholders of all kinds are unable or unwilling to separate the baby from the bathwater. We cannot pay attention to everything so we develop shortcuts to help us cope with a complex world. For example, in the case of banks we may say: I’ve heard bad things about banks; this is a bank; therefore, it is likely to be bad.
The implication of a reputation commons is that you cannot manage your firm’s reputation in isolation from your industry. Even though the eventual destruction of the commons will make all worse off, the dominant economic incentive for individuals to overexploit the commons is difficult to keep in check. The solution for many natural resource commons problems has been to privatize the commons. In an analogous fashion, the solution for an industry faced with a reputation commons problem is to erect what we have termed mental fences that parcel reputation into individual plots.
Consider the risk a firm faces by being in an industry with a few dozen firms, each with a five per cent chance of suffering a major crisis in the next year. If the actions of other firms reflect on all firms in the industry, then it becomes virtually certain that at some point the focal firm will suffer collateral damage. But if the firm can untangle itself from the reputation commons and stake out its own distinct reputation plot it can ameliorate this vulnerability to the acts of others.
Mental fences are built through information disclosure. Transparency, outreach and community involvement help to distinguish firms, making them more than generic players in an industry. This stands in contrast to the common tendency to hunker down. Don’t be a closed box. Most stakeholders, given other demands on their attention, will not take the trouble to look inside a closed box. But once their attention is drawn toward it as a result of an inevitable disaster, they will presume the worst about the unknown contents. It is better to establish transparent relationships in advance, when stakeholders are amenable to listening, and then to keep that relationship alive.
Interestingly, a mental fence built in isolation seems to be ineffective. If a firm does manage to distinguish itself from similar other firms in the eyes of stakeholders it still remains vulnerable to harm from the misdeeds of rivals if these rivals have not also built mental fences. The chemical industry recognized this after the Bhopal disaster and created the Responsible Care industry self-regulatory program, the primary code of which required all member firms to open their doors and closely interact with the community.
Given the massive damage inflicted on the Gulf region, it presently feels rather petty to focus on the welfare of industry in response to crisis. But perhaps an industry’s recognition and better management of their shared fate may decrease the likelihood of future disasters.
