What is Stakeholder Reputation Risk and why is it so dangerous? For the past few years, Reputation Risk has featured in all the prominent Risk surveys – always as one of the top three risks facing an institution.
One definition of Reputation Risk is that it is the current and prospective impact on earnings and capital arising from negative public opinion. This affects the institution’s ability to establish new relationships or services or continue servicing existing relationships. This risk may expose the institution to litigation, financial loss, or a decline in its customer base (and investment downgrades by Rating Agencies).
Reputation risk exposure is present throughout the organization and includes the responsibility to exercise an abundance of caution in dealing with stakeholders. This issue is addressed in no uncertain terms by the new King Code 4 on Corporate Governance.
The Code recommends becoming a stakeholder inclusive company.
However what many executives may not know, is that Reputation Risk can actually be defined in four different ways. This is an important consideration, because how you define something, will influence how you mitigate or treat it.
In my Reputation Risk Management Master Classes this always raises much discussion.
Of the four definitions, international and local research has proved that Stakeholder Reputation Risk is the most difficult risk to predict and manage.
Stakeholders do not always play by your rules. They can rapidly change their views or positions on an issue. The way in which they perceive your company’s behavior, performance and communication influence their decision-making and support of the organization.
Sometimes, stakeholders may use their power and influence in ways that can destroy public sentiment or create the wrong impression.
An example of stakeholder reputation risk gone bad is the State Capture issue and the subsequent closing of the Gupta family’s banking accounts in South Africa. It is also well known that when relationships sour, how difficult it is to open up communication and restore trust – if ever.
It is therefore crucial that Boards and executives address Stakeholder Reputation Risk as a strategic issue.
In my opinion, Stakeholder Reputation Risk is the risk that emerges when the reasonable expectations of stakeholders are not met. What are those expectations? How do we inform, communicate and engage our stakeholders?
How can we manage our stakeholders if we do not have a system, a structured approach to manage the web of relationships with a diverse group of stakeholders?
Effective Stakeholder Management is critical to achieving not only a formidable reputation but key to delivery of the strategic plan objectives. Organisations need support from stakeholders, and building effective relationships with a dynamic range of stakeholders is not only crucial but a daunting task.
Footnote: I will facilitate my Stakeholder Reputation Management Master Class from the 25th – 26th May in Johannesburg. This 2-day training enables delegates with a deep dive into Stakeholder Management and its impact on Corporate Reputation. Delegates will learn how to design and develop a stakeholder system for their organisations.
The Master Class includes an in-depth look at engagement and other techniques and will help delegates to safeguard their organisation against Stakeholder Reputation Risk.