Sunday, November 16, 2008

Reputations at Risk

You do not always deserve your reputation. In the current financial crisis many reputations are being damaged, some justly, some unjustly. Managing reputation is at the heart of my coaching practice, so, here are some new ways to think about it.

Take an average teenage girl. One day someone wants to hurt her and whispers a false rumor... usually about a sexual indiscretion. The rumor is contagious; it infects the minds of her cohorts, ruining her reputation. At least, for a time.

To a teenager the situation is traumatic. And yet, if the girl in question had built a reputation for being trustworthy and loyal, for being a reliable friend and a responsible classmate, her good character would insulate her against calumny.

Not entirely, but somewhat.

If, however, this girl hangs out with people whose reputations leave something to be desired, her own good behavior will not protect her. She will be condemned for the company she keeps, because, after all, your choice of friends and colleagues reflects on your judgment.

When your reputation has been slandered, the facts are rarely decisive. As they say, it is impossible to prove that something did not happen.

So, how should this girl defend herself? Should she fight back; should she retaliate; or should she ignore it?

If she says nothing, is she offering a silent assent? If she flies into a rage, does the intensity of her emotion make the rumor seem more true, or more false?

We know that she should neither over-react nor under-react. But how does she find the median between the extremes? She needs to discredit the rumor, but she needs to do so without making herself look bad. But which reaction makes her look better or worse?

A parent will tell her to told her head up high, to act with dignity and decorum. This is good advice. But what if her refusal to address the rumor is interpreted as a confirmation of its truth.

When someone defames you, you need to craft something of a response.

Railing against the injustice of it all will not restore anyone's good name. Surely, a slander is unjust. When you become emotionally overwrought about the slander, you look bad. And looking bad does not enhance your reputation.

I want to suggest here that it is not about justice. Reputation has its own marketplace where people invest their psychological capital. That means that your reputation is subject to the vagaries of the marketplace. It can be traded on a short or long term basis, and it can become overbought or oversold.

We like to think that it will eventually have some correlation with your value, that is, your character. But that is certainly not going to happen by itself.

You have to manage your reputation as you manage your other investments, carefully and intelligently.

The problem with markets is that, while value does matter, it is not always decisive. As John Maynard Keynes once said, the market can remain irrational longer than you can remain solvent.

We know about the free market in goods and services. And we know, thanks to Oliver Wendell Holmes, that there is a marketplace of ideas. To be fair, however, Justice Holmes called it the free trade in ideas.

So, let us say that there is a free trade in reputations, and that we learn it first in high school, where the currency, as far as girls are concerned, is sexual behavior. Among adolescent females reputation has a specific, narrow, circumscribed meaning.

(I will mention in passing that this observation refutes Freud's stupid idea that women are, by nature, morally obtuse.)

Now, look at reputation in a larger, more adult sense, one that has an especial salience in the New York financial world.

Say that a firm has filed for bankruptcy; everyone whose identity was caught up with that company will lose something of his or her reputation.

The top executives made bad decisions, perhaps honest mistakes, perhaps miscalculations. If that is the case, then everyone's reputation will not suffer as much as it would if the company had been revealed to be a corrupt enterprise.

Lehman Bros. is not Enron.

Yet, if the firm's bankruptcy threatened the world financial system... that is quite a bit more serious than the aftershocks of the Enron debacle.

Within the financial world honorable employees of Lehman or Bear Stearns are not disrespected for the mistakes of those higher up. Potential future employers look at accomplishments, and do not stigmatize people because their bosses decided that 40-1 leverage was safe.

Outside the financial world, things are different. Bankers who made the system run, who used to be masters of the universe, who were the kings and queens of the city, are today more likely to be held in contempt for allowing the system to fall apart.

To the point that people in finance had to think about whether or not they should announce their profession in public.

I would describe this by saying that many reputations went from overbought to oversold in a very short period of time.

There is a lot more to it than merit. And it is surely not just a function of individual behavior.

A year ago, when the reputations of bankers and traders were seriously overbought, how many of those who were basking in the glow of fame and fortune thought to sell... or better, to sell short?

When your reputation is overbought, it becomes the best stock you have ever purchased. It goes up and up and up; is making you a fortune on paper. You start to feel intensely loyal to a stock that has been such a great friend!

When your broker suggests that you might sell some of your shares, you refuse. It is almost as though he or she were telling you to throw your best friend overboard.

When your reputation is oversold you become convinced that there is nothing you can do to restore it. After all, it has crashed... but not because of anything your yourself did.

In times of market crashes, people sell the good with the bad. That is where the money is, and when you have a margin call you need to come up with the money... very quickly, indeed.

A company can be somewhat insulated from the crash if it has solid earnings, and if it pays a dividend, but that does not prevent it from becoming oversold.

What if you find yourself unemployed for reasons that have nothing to do with your job performance. They are throwing out good employees with the bad... often to cover up a mistake. Still, you are out of a job.

How do you rebuild your reputation? How do you approach your job interviews or your next job? People like me and Dov Seidman tell you to maintain your good character, to behave ethically, and to embrace the corporate culture.

And yet, what happens if you were working at Lehman Bros. or Bear Stearns, and you were called upon to demonstrate your loyalty to the company by investing heavily in the company stock?

It is as though you were punished for having good character. It is going to be difficult to show the same loyalty at your new firm.

Given the weight of the trauma, given the unjust hit to your reputation and your bottom impulse will tell you that from now on you will be in it for yourself, and only for yourself.

The problem is: that is what got us into this mess. Too many people were bad stewards of the financial system. Some of them made honest mistakes; some of them simply miscalculated.

Yet, they were all profiting handsomely, and could not be bothered to find out what was going on.

Some have had their reputations destroyed by the crash, but many have emerged, up to now, with their reputations intact. At a time when everyone is blaming bank deregulation, Bill Clinton, to his credit, wondered out loud why no one had noticed that he had signed the bill that deregulated the banks.

At the least this shows that it helps to have friends in the media.

When a Robert Rubin, chairman of the executive committee at Citigroup, admits that he did not know what was generating all of those profits, then something is seriously wrong. Rubin may have known that his and his company's reputations were overbought, but he was not sufficiently responsible to try to do something to avert a pending crash.

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