Numerous studies including the Corporate Risk Barometer survey conducted by the Economist Intelligence Unit a few years ago; have shown that the most significant issues facing business today are; reputation risk (defined as the threat of any event that can damage a company's reputation) and regulatory risk (defined as problems caused by new or existing regulations).
These two risk categories received the highest scores in the Risk Barometer, indicating that they are seen as more significant issues than market risk, foreign exchange risk and country risk by the majority of executives in the survey.
Why should organisations protect themselves against Reputation Risk? Unfortunately many companies damage their carefully crafted reputations either inadvertently or through blatant and incredulous acts. Most of the damage occurs when there is not a clearly defined strategy for building, sustaining and protecting the organisation's biggest risk and asset - its reputation.
The new order of the day seems to be accounting principle restructuring, companies seeking to improve trust building, governance and ethics principles and practices, stakeholders seeking disclosure and shareholders becoming more and more frustrated. Yet, there still seems to be a general lack of understanding the true value and potential of an organisation’s reputation. And, as long as management do not understand how reputational risk manifests; negative articles and doubt about company practices will continue to dominate headlines.
Unwanted actions and negative publicity leads to reputation risk. And reputation risk manifests when perceptions and opinions are influenced by negative experiences, impressions, beliefs, feelings and knowledge that stakeholders have about a company. It often results in loss of sales, share value decreases and breakdown of relationships.
Companies should be asking themselves about what actions they are taking to protect and insure their good name against all types of crisis – especially those that are sudden, smouldering and perceptual !
More and more companies are finding that their once hidden “smouldering crises” are now becoming fully-fledged combustible crises. (A smouldering crisis is any serious business problem which is not generally known within or without the organisation, which may generate negative news coverage if or when it goes “public” and could result in fines, penalties, unbudgeted expenses or unwanted scrutiny).
The damage of a reputational crisis can be direct and indirect. These costs could include penalties incurred because of a lack of legal compliance, litigation, media conferences and advertising costs and the hiring of crises communication consultants to put forward positive messages after wrongful deeds. BUT what about the indirect costs, the effects on various stakeholders? The customers that do not return or stakeholders that takes their business interests elsewhere?
I believe that managers have both a professional and a moral duty to try to protect their company’s reputation. The way to minimise their company’s reputational risk is to be vigilant and report anything, which they believe, could erupt into an issue of unwanted publicity and therefore act to rectify it. But they can only do that if they understand what reputation is all about and how it can be managed and damaged. (The importance of the what, why & how of Reputation Risk Root Cause Analysis is one of the topics that I discuss in my Reputation Risk class).
The best way to address these concerns is through the development of a best practice strategy for the organization that should address these typical questions:
- What kinds of proactive steps should companies take to augment their reputations?
- What aspects of reputation risk are unmanageable?
- Who are the key players in managing a company's reputation?
- How should a company's organization reflect its interest in preserving and enhancing its position?
- What level of risk assessment is expected and how should companies approach this task?
- How can a company identify key risks, analyze their root causes, and take proactive steps to preserve the corporate reputation?
- How can a company's regular risk assessment process help to point out particularly critical areas that could affect reputation?
The next postputs forth further thoughts on best practice.