Michael D. Moberly February 9, 2009
In December, 2005 the Economist’s Intelligence Global Risk Briefing Unit produced a report titled Reputation: Risk of Risks based on a survey and interviews with 269 senior risk managers.
Company reputation is certainly a prized, yet highly vulnerabile asset in my view. The reports’ respondents agreed by stating that it represented a main concern for the majority of risk managers, ahead of, for example, (a.) regulatory risk, (b.) human capital risk, (c.) IT network risk, (d.) market risk, and (e.) credit risk. Perhaps the priorities for some of those concerns have changed somewhat since the publication of the report relative to the current recession. But it’s certainly fair to say reputational risk still represents a very significant concern that can adversely affect, as we’ve seen of late, an entire industry simultaneously, not merely a single company.
Company reputation is an intangible asset of the first order and obviously, a major source of competitive advantage! Company reputation is defined (in the Economists’ report) as ‘how a business is perceived by stakeholders, including customers, investors, regulators, the media, and the wider public’. Company reputation, the report goes on to state ‘declines when experience of an organization falls short of expectations’. But before fully accepting the latter, it’s first necessary to clarify and reach consensus about (a.) whose experience, (b.) what experience, and (c.) which expectations.
Protecting a firm’s reputation is, with few exceptions, the most important, but also, in my view, one of the more challenging tasks/responsibilities in company stewardship, oversight, and management. In large part, the challenges, again in my view, lie in the asymmetric nature – elements of the risks and threats to reputation. The Economists’ study pointed out that (a.) development of (24/7) global media and communication channels, (b.) increased scrutiny from regulators, and (c.) reduced customer loyalty as examples of reputational risk which certainly are not symmetric.
A relevant, but not easily answered question though, about company reputational risk (damage), in terms of trying to mitigate, prevent, or manage it, is whether it should be characterized as (a.) a stand alone issue, or (b.) the consequence of other, perhaps simultaneously converging risks? As I suggested above, reputational risk, in my judgment, is highly asymmetric. In that context, I am inclined to address it not exclusively as a stand alone or separate risk, rather a consequence (by-product, multiplier) of other threats-risks that can materialize and adversely affect a company on various levels.
Respondents to the Economist’ study, report that the three biggest threats – risks to company reputation are:
– failure to comply with regulatory or legal obligation
– failure to deliver minimum standards of service and product quality to customers
– exposure of unethical practices
It’s Important How Company’s Perceive Reputational Risk – Ultimately, its important for company’s to reflect on (recognize) how they actually perceive reputational risk relative to the processes, procedures, and/or programs they (may/may not) have in place to address (mitigate, manage, prevent) them.
For example, when conducting a comprehensive (intangible asset) assessment of a company (which includes reputational risks) and there’s evidence that the company’s plans and/or attitudes for responding to reputational risks appear more closely aligned with ‘crisis management’ than ‘contingency planning’, I will likely engage the senior risk manager for clarity. If its revealed that the company genuinely addresses reputational risks/threats solely in conventional ‘crisis management’ modes, its often an indicator, in my view, that the company may not be consistently monitoring – scanning ‘their horizon and stakeholders’ for risks/threats which is so essential today, and are, my judgment ‘underliers’ to quality contingency planning, not crisis management!