Basic research in experimental economy and evolutionary biology over the last three decades highlighted that reputation is a central feature of cooperation. This can be illustrated with the example of cleaner fishes. Marine cleaner fish (Labroides dimidiatus) feed on parasites they find on the body surface of other reef fishes (so called “clients”). To obtain this cleaning “service”, clients visit cleaner fish at their stations, hence both clients and cleaners profit from cooperation. However, cleaner service can be either good (removal of parasites) or poor (cleaner bites client).
When clients obtain a poor service, they leave the cleaner station to obtain a better service elsewhere. Reputation also matters: when clients queue for a service they can observe the interaction of the cleaner with another client. Watching clients are more likely to leave a cleaning station when they observe that the current client obtains a poor service. As a result, cleaners are more likely to provide a good service (with fewer bites) when they are observed by others.
This example demonstrates that reputational mechanisms are a general feature underlying cooperative behavior across species and, assuming that cleaner fish are not conscious about what they do, the mechanism acts, even though the interacting parties may not be aware of it.
Reputation essentially describes what we know (or believe to know) and feel about other individuals or groups. While a good reputation generates trust which translates into credibility and reliability, a poor reputation can be costly, because individuals neglect others with a low reputation as cooperation partners. A reputation of unreliability and of providing false information can have substantial negative feedbacks on the cheating party. Even rumor or gossip can have incredibility strong negative effects. The reason is that few emotions have as strong effects as those resulting from betrayal. A breach of agreement favors strong impulses such as grudge and vengeance which are opposed to the commitments required in social and economic transactions.
Reputation has long been recognized to be a key element in economic decision making. As reputation is a form of intangible capital, companies compete for the best reputation. Enhancing brand value is thought to be a critical factor of economic transactions and consumer decisions. The reason is that corporate reputation has been estimated to contribute substantially (more than 50%) to a company´s market value.
An essential feature of corporate reputation management is demonstrating credibility by reliable commitments. This involves investments of time and energy in building up trusting relationships with stakeholders such as customers or partners. Moreover, signals that communicate the commitment to refrain from any cheating options are important. For instance, brand value can emerge from a commitment of producing high quality goods and services. Another key measure to underpin credibility is transparency and admittance of external control. For instance, labels such as “organic food” can underpin their credibility by allowing external auditing companies to perform quality checks on products and performance standards.
While reputation management is of critical importance, it tends to be underrated due to several cognitive constraints and biases that prevent accurate judgment of issues that trigger reputational effects. A key factor for why reputational effects are often underrated is that they concern intangible assets. In contrast to tangible assets (money, goods, production facilities), reputational value is hard to measure and reputational effects are difficult to deal with. Due to this, reputational consequences often become most apparent when the positive effects of good image suddenly disappear, hence, when it is already too late. One important bias involved is negative reputation bias, which is the assumption that a negative reputation due to actions that deteriorate valuable relationships (e.g. deceiving) can easily be outweighed by a similar amount of positive actions (e.g., cooperative communication). However, the opposite is the case.
Building up a good reputation takes much time and energy, but this effort can be damaged easily by relatively small negative effects. Warren Buffet coined this the following way: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”. Another bias involved is loss aversion, which is the observation that people tend to attribute a higher value to something they posses compared to something they do not. Building and keeping a good reputation typically requires investments (i.e. giving away something that one does possess) for a return that may, or may not come about due to a gain in reputation. An example is that the requirements involved in stakeholder engagement demand that a project proponent informs and involves all stakeholders proactively (i.e. before they ask for it). Loss aversion may cause reluctance to invest in reputation.
Communication bias is the fallacy that reputation is only about good communication (public relations). However, effective reputation management involves commitments that lead to actions which can than adequately be communicated. For instance, sole communication about stakeholder involvement without corresponding actions is likely to have opposite than desired effects. Group (corporate) reputation management involves the additional challenge that individual actions affect group reputation (they are generalized). Hence, a bad reputation of one member of a group (a politician or an employee) translates into poor reputation of the whole group (all politicians, the company). Likewise, group reputation feeds back on group members. Finally, reputation typically has multiple dimensions. For instance, a company typically has a reputation in different realms such as economic performance, reliability, quality, communication or sustainability. A good reputation in one context (e.g. economic performance) can be in conflict with reputation in another (e.g. sustainable project realization . Current corporate reputation management strategies seek to remove such conflicts by the idea that sustainable project realization is a means for enhanced performance.
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