Michael D. Moberly December 30, 2011
Company reputation is an intangible asset of the first order and, when effectively used and safeguarded, can be a major source of competitive advantage and sustainability. This is probably what prompted The Economist’s Intelligence Unit to produce a ‘global risk briefing’ titled Reputation: Risk of Risks arising from interviews with 269 senior risk managers. Aside from the fact that the report was produced in December, 2005, its relevance remains very much intact today.
Company reputation is certainly a prized, yet increasingly vulnerable and fragile asset in my view which the reports’ respondents agreed by stating that reputation represented a main concern for the majority of risk managers, ahead of, for example:
- regulatory risk
- human capital risk
- IT network risk
- market risk, and
- credit risk.
Interestingly, the priorities of senior risk managers have changed little since publication of The Economist’s report. It’s certainly fair to say then that company reputational risk also has become a very significant (fiduciary) concern, not just for senior risk managers, but for company management teams, c-suites, and boards as well. They recognize the many ways it can adversely affect their company.
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 experiences of an organization fall short of expectations’.
However, before this definition can be fully translated into effective (reputation risk) countermeasures, it’s important for a company to bring operational clarity to:
- whose experience
- what experience, and
- which expectations.
Safeguarding a company’s reputation is, with few exceptions, probably the most important, but also, in my view, one of the more challenging tasks and (fiduciary) responsibilities a company can and should undertake relative to its overall management, stewardship and oversight. In large part I find it challenging because of the asymmetric nature how (reputational) risks and threats can materialize and cascade throughout a company.
For example, The Economists’ study identified three significant phenomena that individually and/or collectively contribute to elevating reputation risk, each of which remains relevant today:
- development of 24/7 global media and communication channels
- increased scrutiny from regulators, and
- reduced customer loyalty
A relevant, but not easily answered question though, about damages a company can sustain as a result of a materialized reputational risk, in terms of prevention, mitigation, or management, is whether reputation risks – threats should be characterized and addressed as:
- standalones, or
- the consequence of other, perhaps simultaneously converging risks?
As already noted above, reputational risk is often (highly) asymmetric in my view. This belief inclines me to address it not solely as a standalone or separate risk, rather a consequence (by-product or multiplier) of risks that can materialize sequentially and adversely affect a company simultaneously on multiple levels.
Respondents to the Economist’ study identified the three biggest risks/threats to a company’s reputation as:
- failure to comply with regulatory or legal obligation
- failure to deliver minimum standards of service and product quality to customers
- exposure of unethical practices
This elevates the importance of how company management teams, boards, and risk managers perceive reputational risks to their company…relative to the processes, procedures, and/or programs they (may/may not) have in place as forward looking monitoring and assessments of internal and external factors/variables necessary to prevent, mitigate, and manage reputational risks if/when they begin to materialize.
For example, when conducting a comprehensive (intangible asset) assessment of a company (which includes reputational risks) and there’s evidence that a company’s plans and/or attitudes for responding to reputational risks appear more closely aligned with crisis management than contingency and organizational resilience planning, I would engage the senior risk manager for clarity. If its revealed that the company genuinely addresses reputational risks/threats solely through a conventional ‘crisis management’ lens, its often an indicator, that the company may not be adequately monitoring – scanning their horizon and stakeholders for risks/threats which is so essential today, and is, my judgment a key underlier to quality contingency – organization resilience planning, not crisis management!
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