Reputation Risk…The Most Difficult Risk For Companies To Manage! Part I

Michael D. Moberly    February 4, 2014   ‘A blog where attention span really matters’!

The ACE Groups’ 2013 Survey of Reputation Risk…

For readers who may be unfamiliar with The ACE Group, it purports to be one of the world’s largest multiline property and casualty insurers for a diverse clientele with operations in 54 countries. In reviewing its 2013 report (survey) ‘Reputation at Risk’ authored by Andrew Kendrick, President, ACE’s European Group, there are some revealing findings that broadens current thinking regarding reputation risk. So much so that business decision makers globally would be well served at minimum, to read this entry, but also read ACE’s entire report.

As readers know, there is nothing particularly new about companies experiencing risks to their reputation.  Too, as readers recognize, seldom, if ever, have company reputation risk(s) been as pervasive and ‘rapid acting’ as they are today.  All one needs to do is execute a quick scan of business publications wherein there is no shortage of articles which draw attention to the extent of ‘reputation risk’ challenges. For example, financial institutions and internet retailers have faced scrutiny and censure for data breaches, supermarkets and food suppliers have faced their own challenges over food production sourcing and contamination; and clothing/apparel retailers have been brought to task regarding poor conditions at outsourced manufacturing sites.

There’s certainly no argument here that a company’s reputation has become, for a variety of reasons, absolutely critical to its strategic financial and competitive advantage health.  That translates as most any company, whether it’s a university-based spinoff, early stage startup, small-medium enterprise, small-medium multinational, and one of the proverbial Fortune ranked corporations.

Reputational risk is different to other risks. It is difficult to define, measure and therefore manage – a task made more complicated by uncertainty over who ‘owns’ the issue inside companies.

Getting their heads around the most difficult risk category…

Four out of five executives surveyed for ACE’s report stated they regard their company’s reputation as its most significant asset. Nothing particularly new here!  But, and, it’s a very big but, despite evidence there is a growing understanding and appreciation for materialized reputation risks and their adverse impact on companies, one of the major challenges survey respondents revealed is quite straightforward, that is, “getting  their head around” the asymmetric and otherwise intangible nature of reputation risk.  More specifically, nine in ten of the survey’s respondents reported that company reputation risk is ‘the most difficult risk category to manage’!

Reputational risk is different to other risks. It is difficult to define, measure and therefore manage – a task made more complicated by uncertainty over who ‘owns’ the issue inside companies.

Also revealed from ACE’s report are respondents’ citing what they believe are factors that contribute to today’s growing corporate reputational risk environment.  ACE’s survey respondents expressed particular concern about the following trends that are influencing and elevating reputation risk levels, i.e.,

  • expanding global footprints and increasingly complex and risk laden supply chains.
  • increasingly dynamic and challenging regulatory environments from which compliance is now considered to be a core competence in many industries with failure to manage regulatory change effectively will inevitably lead to serious reputational damage.
  • rapid company expansion into new markets and the challenges associated with maintaining consistent (ethical, business, product) practices and standards in a boundaryless transaction environment.

Areas that business executives worry about most…

The survey’s respondents reported that…

  • damage to customer relationships, and the
  • adverse financial impact of materialized reputational risk, i.e., loss of earnings, impact on share price, and competitive advantage.
  • the speed at which reputation risks can materialize and cascade throughout a company and its supply – value chain.
  • the reality that reputation risks can emerge from anywhere, at any time, and from any place within a company or along its stakeholder and/or supply chain which makes reputation risks more difficult to predict.

Areas which companies judge themselves to be the weakest regarding reputational risk…

Interestingly, and quite revealing, is the fact that respondents to ACE’s survey cited particular areas where companies judge themselves to be weakest at reputational risk management…

  • measuring external perceptions of the company.
  • quantifying the financial impact of reputational risk, and because reputation risk impact is more difficult to quantify, it frequently makes it less well understood compared to conventional – tangible risks and threats.
  • restoring company reputation after reputational risk incidents have materialized.
  • absence of effective counsel about how to manage reputational risk which elevates sense of uncertainty and confusion about how best to manage reputation risk.

                 fewer than one-third of companies believe they are well prepared to address the above.

There are no singularly magic solutions, nor silver bullets to manage reputation risk…

While, the ACE survey suggested ‘insurance is not necessarily the panacea for the rapidly evolving and escalating challenges associated with company reputational risk, there are some things that insurers can do to collectively benefit their clients and mitigate, if not prevent, materialization of reputation risks.  Some effective measures – steps that business decision makers and management teams should not merely consider, but actually execute, include…

  • do more to evaluate and systematically track the perceptions of primary (external) stakeholders, i.e., customers, media, adverse lobbying groups, and governmental regulators.
  • help these entities acquire true perspectives and insights into challenging trends and problems companies face.

Respectfully, ACE’s global experience conveys that better (company, client) preparation and routine testing of response plans, i.e., business contingency, continuity, and resilience planning lays important foundations for a faster, more effective, and genuine response when reputation risks materialize including reputation restoration in the current instantaneously global social media environment. Again, ACE’s research does not convey there are any easy solutions, particularly when it comes to quantifying the financial impact of materialized reputational risks.

However, as noted here numerous times, as more management teams and business leaders attach a ‘reputational risk lens’ to the myriad of risks being routinely encountered, companies can be better positioned to evaluate any reputational consequences relative to (a.) action, or (b.) inaction.  And that, as readers know, are truly significant advances.  In other words, companies must get better at measuring and managing external perceptions. But, that said, ACE’s survey shows that only a quarter of companies are confident about how they evaluate the strength of stakeholder relationships which we know form a very critical foundational component to reputational risk management.

(A special thanks to Andrew Kendrick, President, ACE European Group, 2013 ‘Reputation at Risk’ Report for inspiring this post.)


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