The Problem with Reputation Risk

Reputation risk has a tendency to emerge when we expect it the least.

Since everything we do and say can have an impact on the reputation of the organization, careful attention needs to be given to the management of a company’s reputation as an asset and a risk.

Worldwide research shows that many private and public sector organisations regard reputation as their biggest risk. Like all of the intangible assets whose value has escalated in recent years (other examples are talent, knowledge, know-how and intellectual property), reputation has been overlooked by organisations because it is so difficult to comprehend.

It is only when a reputation incident severely damages the credibility of an organisation or one of its brands, or its standing in the eyes of its stakeholders, that the potentially catastrophic consequences of not managing the crisis properly become apparent.

Studies of organisations that have handled crises affecting their reputation badly have identified long term and irreparable damage to share price, market share and brand value.

Many organisations make the mistake of assuming that all that is needed is media training and crisis planning. However, a reputation crisis exposes to public and media scrutiny not only the organisation’s competence at crisis handling but the values, standards and shortcomings that existed beforehand.

The reputation strategy should, therefore, have two simple objectives – to prevent the causes that could damage your reputation and to minimise the impact if, despite your best endeavours, a reputation crisis should occur.

It will therefore be in an organisation’s best interest:

  • To ensure that all managers and staff members understand the nature of the organisation’s reputation and their own individual reputation;
  • That the Board establish a reputation risk management strategy;
  • To develop standards and controls for the action that the reputation asset building and risk management strategy places most importance on;
  • To provide reputation management training, education and communication to obtain the vital support and commitment of all employees and managers;
  • To pay special attention to red flags – analysis and monitoring mechanisms to provide early warning of problems or crises;
  • To implement a process of continuous crisis assessment

Some organisations have attempted part of this process themselves, particularly the first four stages. In my experience, they are severely disadvantaged by being too close to the issues, or by risking avoiding taboo or politically difficult areas, or by not challenging assumptions vigorously or objectively enough.

It is often said that a doctor cannot prescribe medicine, unless he conducts a proper diagnosis. The same holds true for definitions. Unless you define something clearly, the wrong approach to deal with it may be taken.

Here then is a few of the definitions that I unpack for my audiences in my Mitigating and Managing Reputation Risk Management Master Class. Use these to define and customize your approach in preparing your organization to deal with unwanted reputation damage.

Although Reputation Risk often is the consequence of lack of compliance for instance, it is vital for compliance experts to understand their role in the management of this intangible but vital asset.

Just consider these two slightly reframed definitions and your role:

Definition 1:

2495004170_4797c10298_mReputation risk is the risk that potential negative publicity regarding an institution’s business practices could cause a decline in the customer base, costly litigation, or revenue reductions.

Errors or fraud can have serious ramifications on the public perception of an institution.

Management can mitigate reputation risk by having an effective public relations program, by developing and maintaining strong stakeholder relationships, and by enacting adequate internal controls over all aspects of the organization and internal systems so that errors do not happen in the first place.

Definition 2:

image descriptionReputation risk 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. Reputation risk exposure is present throughout the organization and includes the responsibility to exercise an abundance of caution in dealing with its stakeholders such as customers and the community.

Very often the issue of materiality can blow a small thing into a large issue.

Exposing managers and compliance experts on how an incident can escalate and create huge impact is vital. Working on these definitions will close the gap between tangible asset control and the impact of intangibles.

An organisation’s reputation remains its greatest asset and risk and needs to be managed accordingly. If you would like to know more about Reputation Risk which is mentioned in the King Code 4 on Corporate Governance, read this blog post – or attend the next Mitigating and Managing Reputation Risk Master Class.