An ounce of prevention is worth a pound of cureBenjamin Franklin
Taj Ridgeway is a senior consultant at Marqui Management in Texas. He consults with blue-chip companies on reputation management and strategic employee alignment. Damage to reputation is an enterprise-wide event that can lead to lowered stakeholder support, a decline in financial performance, and a loss of goodwill with local communities as well as its ‘license to operate’ in key markets.
Reputation risk management is about anticipating threats that may damage the company’s reputation capital.
A recent survey on global risk management, conducted by AON indicated that of the top 10 corporate risks managers see today, ‘damage to reputation’ has the highest threat to value. Although ‘damage to reputation’ tops the list of risks identified by senior managers, fewer than 50% of them claim to have a strategic plan in place for managing reputation risk.
Most CEOs admit that their companies lack coordination concerning who owns reputation risk, and responsibilities are fragmented among a wide range of business managers.
It is crucial that companies implement a Reputation Risk Management Process to objectively and systematically assess potential gaps between stakeholder perceptions and company behaviors. Vital to the success of the process is that a senior executive below the CEO is responsible and that a cross-functional team manages the reputation risks.
We can identify four steps in the Reputation Risk Management Process:
A weak reputation that is not deserved is an opportunity to exploit.
An excellent reputation that is not grounded in reality is a catastrophe waiting to happen.
Prior to joining Marqui Management, Taj ran his own practice advising companies on issues relating to reputational risk, governance, disclosure, and business metrics.
Although there is an increasing amount of evidence that some companies are treating reputational risk with the importance it deserves, probably the majority of companies are still doing very little in this area. There seem to be two principal reasons.
The first is that the issue is still seen as a frontier concept, and some companies have not worked out a process for addressing it – caught in the headlights, and they do not move the agenda forward.
The second comes from companies who argue that no special measures are necessary since all reputational risk is ultimately the outcome of the operational risk materializing. Since these companies claim, operational risk is already being managed then; ergo, they have reputational risk covered.
Neither stance is persuasive, and indeed, neither is defensible from the point of view of directors’ fiduciary duties to shareholders to protect (and grow) the assets of the company. (Not to mention other responsibilities increasingly being introduced to take account of different stakeholders’ agendas). Directors’ inaction could eventually land them in hot water in terms of personal liability, but we shouldn’t see the reputational risk agenda as one simply of threat and downside. There are many positive reasons for taking steps to master this difficult challenge.
To start with, it is certainly true that reputational risk is generated as a result of other types of risk–not just of an operational nature–materializing.
Damage to a key stakeholder relationship could see good employees leaving, or customers taking their hard-earned money elsewhere, no longer prepared to give their custom, or the benefit of the doubt, to an organization in which they have lost confidence. When a damaged reputation leads, ultimately, in non-performance, a fall in revenues, and the threat of the business plan being compromised, we can begin to understand why time needs to be devoted to this area.
Measuring reputational risk exposure, and acknowledging how much value might actually be at risk, allows management to make better-informed decisions about the nature and frequency of their interventions, and it also informs decisions on how much investment is justified in preventing and mitigating these risks. One thing is certain – the cost of preventative action is always less than that of mopping up afterward.