Reputation Risk has been described as elusive and difficult to manage. Some have even called it “Soft issues, tangible impacts”.
Why? Why is it difficult to manage? Well, for one few know how an issue or crisis can erupt. It may or may not. An issue may be material or not.
To understand reputation risk you need to understand some basic tenets of risk and reputation. Risk is something that causes a sudden and unforeseen event leading to loss of expected income, damage to property or harm to individuals. It is the possibility that a future event may cause harm.
Pure risk – a Risk that results only in loss, damage, disruption or injury whilst speculative risk – is a risk which carries the potential of either a loss or a gain. Risk is also a combination of probability and consequences.
In my own consulting work I define, Reputational Risk as the loss of earnings that occur in a situation of negative public opinion. It normally results when the reasonable expectations of stakeholders are not met and culminates in loss of sales, share value decreases and breakdown of relationships. It is the adverse operational and financial impact to business performance when the company’s good name gets tarnished.
In the case of many of the corporate disasters a decision was taken without due thought, to its implications, and hence it backfired. It is thus important to realise that a decision has reputational implications if it has the potential to affect the relationship between the company and any of its stakeholders. In other words, it is difficult to think of a decision that does not have reputational implications. I believe that we can go a long way to minimise corporate disasters if we teach directors and senior executives the value of perception management, stakeholder reputation and good ethics.
By exposing them to these concepts the likelihood of reputation damage can be minimized since they will factor reputation earlier into the decision making mix. My reasoning is that in most of the Corporate Disasters currently there is a pattern of limited and distorted decision making. Many decisions are made not considering all the angles and potential impact zones.
Every decision that an organisation must make has four broad sets of implications. The obvious three sets of implications are operational, financial and legal.
The fourth set of implications is generally ignored, delegated or included in the process only on the basis of the “gut instinct” of one of the participants. This fourth set of implications is reputational.
The reputational implications of a business decision can be defined as those that impact the way in which an organization is regarded by those with whom it interacts, including shareholders, customers and employees, as well as suppliers, government regulators, the media and even competitors (and any other stakeholder). This fits in well with the ecology model of organisational effectiveness. The New Collins Concise English Dictionary defines ecology as:”The study of the relationships between living organisms and their environment, the set of relationships of a particular organism with its environment.”
This means that the ecology model is concerned with the organisation’s ability to deal with internal and external contingencies, and its ability to manage interrelationships between stakeholders in the context of its environment. Any organisation is dependent on its stakeholders for support and the strategic importance of any stakeholder depends on how dependent the organisation is upon it. And this relationship can change over a period of time or due to indiscretions.
Reputation, most managers today would agree, is an asset, even if only a perceptual asset (or, if mismanaged, a liability). It certainly is not optional. Every corporation, organization, institution, individual has a reputation. The only option is whether to manage it or allow it to be inferred. If reputation is a strategic resource and if it is to add value, it should be managed with the same care and attention as any asset. It should be obvious that if a decision has four broad sets of implications, and only three are formally and routinely considered, the potential exists for flawed decision making. After all, the role of a manager is to manage all the assets under his or her control effectively.
Most Directors, leaders and managers have never received training in managing an organisation’s reputation, yet some studies now show that reputation can make up as much as 55% of an organisation’s share price. They receive training in Corporate Governance, but companies tend to forget why governance is important. The end purpose of governance is to be perceived in an excellent manner by your stakeholders. Thus the end purpose of governance is to have an excellent reputation.
A large proportion of intangible assets is thus not being adequately managed and may be at risk in today’s knowledge based economy.
By getting directors and senior managers to interact and learn about the link between reputation and effective decision making you will raise the ante, improve their competences and minimise the likelihood of reputation damage. Davis Young, in “Building your company’s good name” wrote:
“Every employee needs training to understand the impact their actions have on your company’s good name and its business success. This training needs to start the day they are hired, with daily reinforcement thereafter, if only through leadership modelling. Every employee must understand the importance of his or her actions in terms of what those will mean to the organisation’s reputation”
Companies, who do not provide reputation management training to their directors, and senior executives, are at RISK.