July 13th, 2009
Dr. Majorie Dijkstra is senior consultant at Reputation Institute in the Netherlands. She consults to blue-chip companies on reputation management and strategic employee alignment.
Executives know the importance of their companies’ reputations. Firms with strong positive reputations attract better people. They are perceived as providing more value, which often allows them to charge a premium. Their customers are more loyal and buy broader ranges of products and services. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher market value and lower costs of capital. In an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations. Damage to reputation is an enterprise-wide event that can lead to lowered stakeholder support, decline in financial performance, and a loss of goodwill with local communities as well as its ‘license to operate’ in key markets.
Most companies, however, do an inadequate job of managing their reputations in general and the risks to their reputations in particular. They tend to focus their energies on handling the threats to their reputations that have already surfaced. This is not risk management; it is crisis management – a reactive approach whose purpose is to limit the damage. 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 with respect to 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:
1. Identification of reputational risks- assessing the gap between stakeholder’s perceptions and beliefs and the actual performance of the company.
2. Prioritizing reputation risks and stakeholders- assessing the probability of risks and the impact of the risk on reputation.
3. Identification of effective means for mitigating risks and executing the risk strategy- assessing the best response strategy based on controllability of risk, the impact of risk on the business across stakeholders and the cost of implementing the strategy.
4. Monitoring changing beliefs and expectations-by closely monitoring changes in stakeholder’s beliefs and expectation that may affect reputation.
Ultimately, risk management is about both anticipating strategic issues and leveraging opportunities to engage with the company’s key stakeholders around topics and initiatives that are most relevant to them. Effective risk management is about aligning perception and reality.
A weak reputation that is not deserved is an opportunity to exploit. A great reputation that is not grounded in reality is a catastrophe waiting to happen.
Tags: brand equity, Reputation Risk, risk, stakeholder support
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July 1st, 2009
Seamus Gillen is Managing Director, Reputational Risk Practice, Reputation Institute UK. Seamus worked for the UK Government as a senior policy adviser, becoming Private Secretary to the UK Secretary of State for the Environment, and then the UK Deputy Prime Minister. Prior to joining Reputation Institute, Seamus 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 seems to be two dominant 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, 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 operational risk materialising. Since, these companies argue, operational risk is already being managed then, ergo, they have reputational risk covered.
Neither stance is persuasive, and certainly 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 duties increasingly being introduced to take account of other 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–materialising. But devising an approach to managing reputational impacts with this perspective alone represents an inadequate management response. Reputational risk permeates, and pervades, all aspects of a company’s operations, and so reputational risk should be marbled throughout a company’s risk register. This means not treating reputational risk as a discrete risk category or classification, but understanding its presence in everything that goes on inside a company.
The main justification–or business case–why reputational risk should be modelled is because the underlying effect and impact of damaged stakeholder relationships can be more pervasive and longer-lasting than the immediate losses resulting from the crystallisation of the original (operational) risk. Companies which have suffered reputational hits have often taken years to recover, and the transaction costs associated with restoring damaged stakeholder relationships, and re-establishing business continuity, have to be factored in in addition to the operational losses.
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 organisation 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.
A properly-initiated strategy helps to protect the value of the company – the deployment of reputational capital to protect the existing revenue streams and future earnings growth so highly prized by investors. Or, in other words, developing a deeper understanding of intangible stakeholder sentiments to deliver hard-edged business benefit.
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 afterwards.
Tags: Reputation, risk, stakeholders, trust
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June 14th, 2009
Dr. Charles J. Fombrun is founder and Chairman of Reputation Institute, a private research and advisory firm based in New York, and a former Professor at New York University's Stern School of Business.
The U.S. is in a profound reputation crisis. The prestige of the world’s most powerful democracy, its leaders, its financial sector, and its largest companies are at an all time low. To address this reputation crisis calls for a comprehensive recovery plan. Although local economic investments, tax cuts, and a financial bailout of many companies, industries, cities, and states will be necessary components of such a plan, they will be far from sufficient. They must be matched by a dramatic change in the national conversation, and complemented by a set of targeted initiatives designed to capitalize on the wave of optimism and hope that have carried Mr. Obama into the White House. Only in this way can the United States rebuild the mistrust that consumers here and abroad now have of the U.S., its leaders, and its institutions.
Clearly trust in the U.S., its leaders, and its institutions is now sorely lacking. It explains the now tarnished reputations of once revered institutions such as Goldman Sachs and Morgan Stanley. It also explains the sudden disappearance from the corporate landscape of respected companies like Bear Sterns, Merrill Lynch, Lehman Brothers, and Washington Mutual. And it’s a costly process: In 2008, over $382 billion in market value evaporated with the demise of these four corporate titans alone.
If the U.S. today is in a reputation crisis, it is because we have consistently failed to fulfill the expectations of our key constituencies around the world. In doing so, we have lost not only the trust and support of the American public, but also the respect and admiration of the international community. The recovery plan we need from the Obama administration must go far beyond the ones Congress has passed. It must address how the U.S., its leaders, and its institutions will rebuild our damaged reputation capital by living up to the promises we have made to our global stakeholder community.
Dr. Fombrun is the author of numerous books, including the path-breaking best-seller Reputation: Realizing Value from the Corporate Image, first released by Harvard Business School Press in 1996. Dr. Fombrun has published hundreds of articles in leading management journals, and is the creator of reputation management systems used by many companies around the world.
Tags: Add new tag, Charles Fombrun, Obama, Reputation, United States
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