Managing Reputation Risk…
Recent disasters involving BP in the Gulf of Mexico, and the Japanese
government and The Tokyo Electric Power Company at the Fukushima
nuclear power plant are evidence of the complexity of large-scale
crises, the rapid escalation of events with which they are associated
and the failures of sophisticated global organizations to communicate
effectively.
In business as in life, crises come in as many varieties as the common
cold. Crises that have traditionally created the greatest public interest
are those commonly described as disasters: airplane and rail crashes
or public health and environmental failures involving tragic loss of life.
The scrutiny of those perceived to be responsible for such events is
intense and unforgiving. However, they are not confined to disasters.
They can occur for reasons as diverse as safety lapses, inadequate
staff training, unethical behaviour, poor governance or information
disclosure, negative media scrutiny, threat of litigation, poor internal
systems and controls.
The costs of a crisis also vary. Damage to reputation can have far-reaching
implications beyond an initial financial loss associated with
clean-up, product recall and reparation costs. Product boycotts,
share price collapse, loss of competitive advantage and unwanted
market volatility often have more damaging consequences for a
company or a whole sector. Companies that have been the subject
of crisis situations, perceived to be either badly handled or the result
of significant operational failure – particularly where the result has
been loss of life, injury, large scale environmental damage or asset
reduction – have experienced not only share premium erosion, market
share loss and debt-rating decline, but also unwanted litigation and
regulatory costs. And where organizations have failed to communicate
effectively in the immediate aftermath of a crisis, research indicates
that the consequences of adverse public perception, media scrutiny
and pressure for tougher regulation mean that the degree of financial
loss can be greater, last longer and be more difficult to recover from
– in some cases resulting in brand or corporate collapse or making
a company vulnerable to take-over. Negative perception and loss of
trust in the eyes of customers, investors, employees and communities
indicate that:
- Insurance liability cover following a crisis will not protect shareholder value
- Recovery depends on the quality of management response
- Share price can be an effective measure of post-crisis management
- Investment in effective reputation management before a crisis situation is critical in conserving value.
Reputation is a reflection of how stakeholders view an organization
through the attitudes, associations and expectations they have; this
implies a value judgement and plays to both the rational and emotional
attachments we have of an organization. It influences who we buy
from, work for, supply to and invest in and so has a real value attached
to it. Reputation depends on successful relationships inside and
outside the business, based on mutual trust and belief. So reputation
risk may be defined as a gap between performance objectives and
stakeholder expectations. Successful reputation risk management is
about closing that gap to minimise unwanted surprises and to exploit
competitive opportunities against a back-drop of:
- Increasing demands for good corporate governance and risks associated with ignoring stakeholder expectations and associated impacts
- A continuous drive to reduce costs
- The need for strategic intelligence to fuel innovative product pipelines and partnerships
Reputation is any organization’s biggest asset – valuable and yet
vulnerable because when something goes wrong, if it is not seen to
respond quickly and effectively by managing both the operational
and communication response together, a reputation invested in over
many years can be destroyed virtually overnight and with little chance
of recovery. Even the best intentioned companies can, on occasion,
lose sight of the basic guidelines that underpin good business focusing
on short-term reporting requirements at the expense of longer-term
impacts; stock price is still king but ignoring the wider consequences
of what companies are doing can create unwanted market volatility,
Businesses are operating in a complex global environment of
unprecedented rapid change, characterised by more intense scrutiny
and demands for greater accountability and transparency. This is
fuelled by a more intrusive, simplifying and sensational global media
and internet environment, providing many alternative sources of opinion
and information which makes it difficult for companies to maintain their
share of voice. In this fast moving, inter-connected world, perception
can rapidly become reality. Negative perception and associated
loss of trust are a constant threat to reputation. Understanding and
communicating around risk perception can reduce conflict and market
volatility and gain the support and goodwill of influential stakeholders.
It is rather like having a reputation bank account. Corporations that
build strong relationships with their key stakeholders, which facilitates
understanding of business strategies and practices, can accrue
goodwill in their reputation bank accounts. Quality of relationships
and the provision of quality information can help to generate interest
in good times, for example, through reducing barriers to competition
and market development, and creating a more conducive environment
for investment and access to capital. It can also help to measure
social and environmental reporting, inform corporate governance and
anticipate future regulatory requirements. However, if the going gets
tough, these companies can draw on the goodwill in their reputation
bank accounts through gaining time and support to mitigate a risk or
fix a problem without incurring the intense negative scrutiny that an
organization working in isolation may easily face and fail to recover
from. So reputation management also provides an insurance policy in
times of pressure.
Most senior executives of major corporations agree that reputation
is an incredibly important asset. Yet it is not always the case that
corporations actively own and manage reputation in the boardroom and
there is still a way to go for businesses to routinely factor reputation
risk into operational risk management strategies. Keys to success are:
- First, to acknowledge that reputation is a valuable asset. It needs to be actively managed in the board room and across the organization, not ghettoized in the PR or marketing department – it should reflect the character and values that bind the organization and its relationships together
- Second, to develop a finely tuned radar and become a listening company – the ‘decide, announce, defend’ model of communication in response to a problem is unacceptable so it is crucial to find out what stakeholders think and want and then work to align organizational objectives with their expectations
- Third, design clear and robust reputation risk management systems that integrate with routine risk management processes and are regularly reviewed at the highest level.
- In an uncertain world there are few certainties other than death and taxes. In the absence of certainty, openness and accountability underpinned by an organization’s ability to anticipate the potential for change, assess the impact of that change and align its relationships with stakeholders are the crucial ingredients | successful strategic reputation risk management.
Example model showing the evolving lifecycle of a risk issue with emphasis on the
need for early engagement in order to mitigate against potential risk impacts.