Risk to Reputation: the Meta Risk12 years, 8 months ago
Why reputational risk should be incorporated in existing risk management practice. By Koenraad van Hasselt.
In the aftermath of serious corporate governance failures and other major catastrophes, corporate reputation management has become all the more important due to regulatory compliance requirements, strengthened regulatory powers, the growing influence of pressure groups, rising stakeholder expectations and – last but not least – communications technology. In this day and age, everyone has mass media at their fingertips enabling them to broadcast their opinions and rally support for these opinions at phenomenal speed.
A company’s reputation is valuable on two counts: first, its intrinsic current value as an intangible asset and secondly, its ability to create – or destroy – future value.
Reputation will not appear as a separate item on a business’s balance sheet but generally represents a significant proportion of the difference between market value and book value (minus any quantifiable intangibles such as trademarks and licences). As total intangibles often account for some 75% or more of market value, reputation is, for many businesses, their single greatest asset.
A good reputation enables a company to attract the best resources from the market, whether this be finance, people or suppliers. Stakeholder support does not only secure a business’s continuing licence to operate, but provides it with a licence to expand and generate new partnerships and income streams e.g. by helping to secure preferred partner status on future projects or by enabling premium pricing for products and services. Reputation thus becomes a potential source of competitive advantage and a key determinant of future business success.
Perhaps the greatest benefit of a ‘good’ reputation is its capacity to provide a reserve of goodwill (often called ‘reputational capital’ or ‘reputational equity’) that can help the business withstand future shocks and crises. Such reputational capital, which underpins stakeholder trust and confidence, can act as a buffer or ‘airbag’ at times of crisis and persuade stakeholders to give a business the benefit of the doubt and a second chance.
In short: a good reputation makes a company more resilient.
What makes a good reputation?
The main question should, therefore, be to determine what makes a good reputation. The theory is simple: an organization enjoys a good reputation when it consistently meets or exceeds the expectations of all its stakeholders.
Maintaining a good reputation therefore requires continuing identification and management of emerging gaps between experience and expectations and between claims and reality.
By measuring, analyzing and monitoring stakeholder opinion, early signals of both negative and positive stakeholder sentiment can be detected and patterns can be recognized. With these insights, risks to reputation can be averted or at least mitigated. Any risk in the usual risk classification (strategy, compliance, operations, reporting, governance) can affect reputation. When reputation is tainted, it can impact any other risk. Therefore, reputation should be treated as the risk of all risks: the meta risk.
It is therefore vital that reputational risk is integrated in the core business risk framework enabling the use of the resources, processes and structures that are already in place. Risks to reputation are reported alongside other business risks, and receive attention from the right person at the right level for corrective action or stakeholder engagement, often the communications department.
A new reputation model
The most crucial step in managing reputational risk is the initial identification of those factors that could impact reputation, either positively or negatively.
The Riiß Reputation model recognizes nine reputation drivers, classified into three sections:
A good starting point is to consider each of the nine drivers of reputation in the light of the stakeholder group or groups that have an interest in it. In addition, stakeholder opinion should be measured and analyzed against each of the company’s strategic thrusts. This can be mapped on a reputation risk driver/stakeholder matrix to produce a heat map highlighting potential reputational hot spots that warrant further attention. Once risks to reputation have been identified and responses designed and implemented, the risk should be regularly monitored by management to ensure the responses are having the desired effect and to spot any changes in stakeholder sentiment.
Risk information needs to reach the right people (both internally and externally) at the right time if it is to have the desired effect. All too often information on risk to reputation is available within the organization, but not shared with the right people.
A risk to reputation programme: how it works
The starting point for implementing a risk to reputation programme is a so-called ‘discovery’ phase, the ‘inside-out’ perspective outlining the views of company executives on the company’s mission, vision and values, strategies, assumptions, known risks, key stakeholders and existing risk management practice. The second phase of the programme is the ‘base line’ study, the ‘outside-in’ dimension, which reflects stakeholder views of the company’s strategies, the reputation drivers and their potential for disrupting or leveraging strategy execution.
The third phase is the ‘execution’, which involves a 360º measurement, analysis and monitoring of all stakeholder opinions. This holistic approach enables management to anticipate on risk to reputation and identify opportunities for strategy enhancement.
Risk to reputation management may well prove to be the cornerstone to the desired integration and alignment within companies if executives and board members keep in mind that a reputation must be built both ‘inside out’ and ‘outside in.’ Corporate Communications may well be the initiator and driver of a consolidated risk to reputation approach, building a leading coalition with its colleagues from, among other, risk management, corporate control and corporate marketing. Bringing valuable insights on stakeholder opinion and potential risks to reputation to the Boardroom, corporate reputation will be given the attention it deserves and earn Corporate Communications a standing invitation to the Boardroom strategy discussions.
Koenraad van Hasselt, Reputation Matters, Corporate Communication & Brand Strategy.mail the author
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