Financier Worldwide says a good reputation is among the most important assets a company can possess. However, this asset is fragile. In the event of a scandal, disaster or accident, a reputation that has taken years of diligence to build can be damaged in the wink of an eye and may, in some cases, be impossible to repair.
Reputation can be difficult to define, given that the perception of what is and is not reputable is ‘in the eye of the beholder’. However, the potential for irreparable reputational damage is why companies are well-advised to continually assess the business risks they face and reduce the possibility of worst-case scenarios.
“Reputation risk is generally defined as the risk to an institution from changes of perception by its key stakeholders, including customers, investors, and regulators,” says Daniel Hermansson, engagement manager at Oliver Wyman. “The change of perception can stem from a wide range of events, but is driven by the belief that the future ability of an organization to deliver on stated goals and performance targets will be worse than previously expected.”
In its 2017 report, ‘The hidden cost of reputation risk: an approach to quantifying reputation risk losses’, Oliver Wyman characterizes reputation risk as a “multiplier effect”, where the financial impact of a risk event is exacerbated by the reputational damage it causes. “As such, it is important for organizations to understand what type of risk events have the largest potential reputational risk impact (e.g., where the direct financial impact to the business is small, but the reputational cost is extensive) and take that into consideration when assessing the risk of its current businesses or some potential new venture”, states the report.
Key areas of focus
The management of reputation risk is a complex endeavor. In its 2016 report, ‘Board Oversight of Reputation Risk’, Protiviti sets out 10 keys to help companies anticipate and prepare for a reputational attack: (i) effective board oversight; (ii) integration of risk into strategy-setting and business planning; (iii) effective communications and image (and brand) building; (iv) strong corporate values, supported by appropriate performance incentives; (v) positive culture regarding compliance with laws, regulations and internal policies; (vi) priority focus on positive interactions with stakeholders; (vii) quality public reporting; (viii) strong control environment; (ix) company performance relative to competitors; and (x) world-class response to a high-profile crisis.
“While a one-size-fits-all approach does not exist, how a company addresses these keys will help shape its reputation over time,” notes the report. “Reputation risk management is inextricably linked to the risk management and crisis management disciplines, as well as to a company’s alignment of strategy and culture, and its commitment to quality and operational excellence.”
Another area where attention needs to be focused, and at the board level, in particular, is social media and the impact the platform can have on molding public opinion to the detriment of a company’s reputation. “Social media has given everyone a voice and companies are finding out that even small issues can quickly escalate into reputation-damaging news stories,” says John Palmiero, senior vice president of EMEA at MetricStream.